How a phonecall and some paperwork can lead to a sweeter retirement
How does one retire in peace exactly? Contrary to what you might believe, you don’t need millions to retire comfortably. To me, peace in retirement means that I get to live a simple middle class lifestyle without having to worry about big financial obligations.
Simple habits like maxing out your 401K contributions and living on your budget are easy to set in motion. These small steps snowball into a massive payoff that you only see 20 – 30 years down the road.
One move you should make every 10 or so years is refinancing your mortgage. Yes, you can retire even if you haven’t paid off your mortgage if you’ve done your cash flow planning right! That’s where refinancing comes in – to lock in a fixed, low payment that you can afford.
Like the small steps I mentioned above, picking up the phone and speaking to a couple of bankers can have a huge impact on your retirement. And it’ll only take you a few hours – not a whole lot if you consider the lasting benefits of doing so!
Even if you’re not looking to retire, this could be a powerful tool if you’re in a financial pinch. While you could always work with a licensed money lender like Bugis Credit to tide you over a rough financial patch, refinancing can really be a strong sustainable way to reduce your cash outflows!
If you’re interested in how refinancing can pay off for you, keep reading!
Why would you want to refinance?
In short – you want to reduce your interest payments. Paying less interest to the bank is at the heart of refinancing. Having certainty (read: a fixed rate) is also something you might want to achieve with refinancing. Now, you might ask:
I’ve been happy with my rate for years, so why should I change?
Here are just a few reasons:
- Interest rates might have changed since you got your mortgage – interest rates go up and down according to economic cycles and central bank policy. So even though you might have received a reasonable rate initially, your rate might be considered high compared to the interest rate environment now.
- Your favorable rate might have expired – banks often lure customers in with great rates to begin with. But often your contract will state that you will only enjoy your low fixed rate for a specified period (usually a few years). When your rate “expires”, you’ll often get a new rate that might be based on the prevailing interest rate environment that is a lot less favorable.
- Your financial situation might have improved – perhaps your credit and financial situation wasn’t as good when your first got your mortgage. Your bank might have given you a contract with some onerous terms – like a high interest rate, or a variable interest rate. Variability can cause stress especially if you’re not expecting to be earning a regular income for your job.
How banks decide how much you should pay
Typically, banks determine how much (or little) you should pay based on your credit worthiness. If you’re financially secure, meaning you have a stable income, low debt etc. You can expect banks to offer you a lower rate.
Not only that, you can expect that banks will be fighting over each other to get you as a customer!
That means that you have the benefit of shopping around. Let your prospective lender know that you’re talking to a few banks, and I’d bet my top dollar that they’d be interested to know what their competitors are offering you (so that they might undercut them).
One way to quickly work out your credit worthiness is to get your free credit score online. Otherwise, it’s no biggie – your banker will likely do their own checks on your credit report. But be aware that these checks might lead to hard pulls on your credit report, which could lower your credit score!
How to go about refinancing
Here are some steps you should take when refinancing:
- Get your credit report – you can find numerous sources that provide your credit report for free. If you’ve got a good score, you can be more confident that you’ll be able to refinance at a lower rate.
- Talk to your current bank first – make a call to your current loan officer. Ask them if there is a way to lower your interest rate right now. Usually it’ll mean that you sign a new contract, locking yourself in to be their customer for another decade or so. Your bank already has all your information on file (like your repayment history), so this would be the easiest way to refinance.
- Speak to other banks – once you know what your own bank is offering, it’s time to use that as leverage with some competing banks! A short phone call should suffice, and your bankers will do the work to come up with a quote.
- Compare rates and decide – once the various banks come back with their quotes, it’s just a matter of comparing their offers. On top of interest rates, you should look at terms like minimum tenure before you can refinance again, penalties etc.
Lastly, watch out for penalties
Ah, there’s always a catch isn’t there! This is why it’s super important to check the terms of your mortgage agreement. Some banks will lock you in by imposing an early repayment penalty. Yes, your new bank will be paying down your mortgage and therefore incurring the penalty. So you must consider if the switch is worth it by comparing the penalty with the amount of money you can save.
F0r that, you can use a dedicated mortgage refinance calculator.
Refinancing is a responsible financial move, and you should look into it every decade or so. This is especially if your interest rate is kicked up a notch (variable rate), interest rates have fallen in general, or you simply have a better financial situation than before.
If you’ve successfully negotiated a better rate, or have any advice on refinancing at all, please let us know in the comments!