Pros and Cons of Home Loan Refinancing in the Philippines

Refinancing your home mortgage loan can be a great way to save money or change the loan terms. But it's also important to weigh the pros and cons before you do it.

On the plus side, refinancing can lower interest rates, which can save you money on your monthly payments. It can also shorten your loan term, which means you'll pay off your mortgage faster. And if you have built up equity in your home, you may be able to refinance and take out some cash.

However, there are also some potential drawbacks to refinancing, as it can break your personal finances. So, before you decide to refinance, it's important to do the math and make sure that the benefits outweigh the costs to get the best deal.

5 Major Benefits of Home Loan Refinancing

Refinancing a home mortgage loan can have significant benefits. But, the specific pros will depend on the terms of the refinance, your individual situation, and financial goals.

Here are some of the advantages of home loan refinancing in the Philippines.

Lower Interest Rate

For one, Home refinancing allows you to take advantage of lower interest rates available in the real estate market. For example, if you have a 30-year mortgage with an interest rate of eight (8) percent, you could save about PHP 1,693 per month by refinancing to a 30-year mortgage with an interest rate of six (6) percent. Thus, you can reduce your monthly mortgage payments and save money in the long run.

Improved Loan Terms

Refinancing allows you to renegotiate the terms of your loan. You can pick a new loan term that suits your financial goals, whether it's a longer term to reduce your monthly payment or a shorter term to pay your loan faster. 

Cash-out Refinance

If you have built up equity in your home, you may be able to refinance and take out some cash. This can be used for several purposes, such as home improvements, debt consolidation, or college tuition.

Change to a Fixed Interest Rate Mortgage

If, for instance, you have an adjustable-rate mortgage (ARM), consider refinancing to a fixed-rate mortgage. This will protect you from interest rate fluctuations in the future.

Flexibility to Switch Lenders

Refinancing provides an opportunity to switch lenders if you're unsatisfied with your current lender's service or want better terms. This flexibility allows you to find a lender that offers more favorable conditions and customer support.

5 Potential Drawbacks of Home Loan Refinancing

On the other hand, you must also need to consider the potential disadvantages as well. Assessing these factors in relation to your specific financial situation can help you determine if home loan refinancing is the right choice for you.

Closing Costs

Refinancing will likely involve closing costs, depending on the lender and the loan amount. This can include appraisal fees, title insurance, origination fees, and other administrative charges. Therefore, you might not break even if you opt to refinancing your home loan.

Monthly Payments

If your interest rate does not go down by enough, your monthly payments may actually increase after refinancing. This is because you will still have to pay the closing costs, which will be added to the principal balance of your loan. So, there’s a huge possibility that your monthly and interest payment could increase.

Impact on Credit Score

If your credit score has gone down since you took out your original mortgage, you may not be able to qualify for a refinance at all. Note that lenders will look at your credit score when they decide whether to approve your loan. So if you apply for refinancing, it can temporarily lower your credit score.

Prepayment Penalty

Some home loans in the Philippines may have prepayment penalties, which are fees charged if you pay off your loan early or refinance within a specific period. These penalties can offset the potential savings from refinancing. Review your existing loan agreement to understand if any prepayment penalties apply. 

Emotional and Time Investment

Lastly, home refinancing requires time and effort to research lenders, gather documentation, and go through the application process. So, it can be a somewhat complex and stressful endeavor for you to take.

Factors to Consider Before Refinancing Your Housing Loan

Every individual's financial situation is unique. But there is no right or wrong answer; the best decision will depend on your circumstances. Thus, consider the following factors before refinancing your home loan.

Evaluate Potential Savings

Calculate the potential savings by comparing your current mortgage payment with the estimated new monthly payment after refinancing. Consider factors such as lower interest rates, shorter loan terms, and reduced mortgage insurance costs. Assess whether the overall savings justify the costs of refinancing, including closing costs and appraisal fees.

Consider Interest Rates

Take advantage of lower interest rates to secure a more favorable rate on your refinanced mortgage. Lower interest rates can reduce your monthly payments and long-term interest payments. Compare interest rates from different lenders to make sure you're getting the best possible rate. Hence, this will allow you to save money over the life of the loan.

Assess Loan Terms

Determine whether you want to shorten or lengthen your loan term when refinancing. Shorter loan terms can help you pay off your mortgage faster and save on interest payments, but they usually come with higher monthly payments. Longer loan terms may reduce your monthly payments but can result in higher interest costs over time. Thus, consider your financial situation and long-term goals to make the right decision.

Factor in Closing Costs

You must also understand the closing costs associated with refinancing, such as appraisal fees, credit report fees, and loan origination fees. These costs can vary among lenders, so compare offers to find the most favorable terms. Calculate the break-even point—the point at which your monthly savings from refinancing offset the closing costs—to assess the cost-effectiveness of the refinance.

Evaluate Other Debts

If you have high-interest debt like personal loans or credit card debt, consider consolidating them into your refinanced mortgage. By incorporating these debts into your mortgage, you can potentially benefit from lower interest rates and simplify your finances. However, be cautious as this approach may increase your loan balance and extend the repayment period, costing you more in the long run.

Buying your dream home should not be full of financial issues that could cause you emotional stress. If you want to ensure you’re investing in the right property, it is best to seek professional advice from real estate experts. But if you want a safer investment, start with an affordable house and lot for sale unit. Take one step at a time and practice the right money habits before jumping into another venture. Once you master the art of investing, there’s no doubt that you can achieve your dream goals at the right time.

For better housing offers, check out our selection of affordable house and lot properties in over 50 key locations in the Philippines. Lumina Homes offer budget-friendly housing packages that fit within your budget and means. So, visit the nearest Lumina office for details and inquiries.