One of the biggest steps in a young adult’s life is getting a new home. With home prices rising, the only option for many people is financing a mortgage through a bank. However, most people approach this process with a lack of sufficient knowledge.
Home Refinance 2021 In UAE: What You Need To Know
Consequently, they can land themselves in a position where they end up in a mortgage with unfavorable terms. These terms can manifest in the form of excessively long duration or high monthly payments. Certain mortgage conditions can leave the borrowers feeling completely helpless and that’s where refinancing comes into the picture.
What does Refinancing a Mortgage Mean?
Refinancing a mortgage essentially means that you’re going to be trading in your old mortgage for a new one. That may mean that you have a completely new balance.
Essentially, when you go to the bank for refinancing, they’ll pay off your old mortgage completely with a new one. That’s why they call the whole process refinancing.
Most borrowers choose to go for refinancing in a bid to get a lower interest rate and shorter-term duration. Alternatively, borrowers can also apply for refinancing if they want to take advantage of the equity they have earned on their house and are in need of some quick cash.
There are two main forms of refinancing; rate and term refinancing and cash-out refinancing.
Rate and Term Refinance
As the name suggests, in rate and term refinance, the borrower will receive a new mortgage with a lower interest rate and offers a shorter term. It’s to the benefit of the buyer to apply for refinancing when the interest rate in the market is lower than the terms of their current mortgage.
In certain scenarios, the applicant can apply for refinancing and get the same monthly payment they have in a 30-year mortgage from a 15-year mortgage. Before applying for a rate and term refinance, the borrower should identify their break-even point.
Alternatively, in a cash-out refinance, homeowners can refinance around 80% of the value of their current home for cash. Take, for example, a house that costs 100,000 AED and you still owe AED 50,000 on the loan. The banks or a lender can then give you AED 30,000 in the form of a cash-out loan.
Before applying for cash-out refinance, the applicant needs to properly assess whether they have the facilities to account for their larger liability. Cash-out refinancing isn’t simply free money that you get and you’ll need to pay it back!
It definitely makes sense to apply for refinancing on your current mortgage. You’ll get better rates and a shorter term which will be significantly lighter on your wallet. Always remember, the shorter your term, the less you’ll have to pay in interest!