The Nigerian real estate industry experienced a breakthrough at the start of the year with the launch of the Nigeria Mortgage Refinance Company (NMRC). This has brought a welcome change to the industry that has a housing deficit of about 17 million units (with additional 2 million units added each year) and would significantly improve access to housing finance this year.
What is Mortgage refinancing?
A mortgage refinance refers to applying for another mortgage to replace an existing mortgage on a property. This situation is common in times where there is a fall in mortgage rate. For example, if mortgage rates happen to be lower at the present moment than when the home was originally financed, or if the homeowner decided upon an adjustable rate mortgage accompanied with a lower interest rate than the current rate, the monthly payment will actually go down. Even an interest rate reduction of one-half of a percent can make a difference in the payments that is quite noticeable.
Type of Mortgage Refinance
Depending on your situation, different types of home mortgage refinance will be better suited to address your needs. Common ways to refinance your mortgage include:
Fixed Rate – With this refinancing option, the homeowner is given a fixed rate interest amount. This gives them peace of mind, because they know that ten or fifteen years down the road, their interest rate is going to be exactly the same as it is now.
Adjustable Rate Mortgage – The opposite of the fixed rate mortgage, the adjustable rate would allow individuals to experience seriously low rates. It’s a bit of a gamble, but if interest rates go way down, individuals will be able to enjoy the break. There is always the risk that the rates will increase, though.
Cashing-out Equity with Refinancing – This option allows individuals to cash out their equity and use it for major purchases, improvements, bills, etc. Individuals who decide to go this route can often still choose from a fixed or adjustable rate mortgage and can sometimes increase the term of their loan, making payments smaller and more affordable.
Creative Terms – Some companies offer creative terms for refinancing, such as interest only refinancing and more. The refinancing company should work with each individual to determine what kind of creative terms would best benefit their situation.
Mortgages are refinanced as it;
• Shorten the term of the loan
• Lowers interest rate and payment
• Provides an opportunity to refinance from an adjustable rate mortgage to a fixed rate loan
• Provides an opportunity to cash out home equity
Understand the Reasons for Refinancing
Homeowners often have different reasons for refinancing. Some simply seek to reduce their rate of interest. However, that may not always be to their advantage, as the related fees may end up being more that the gains from the rate reduction. In order to make the best decision, it is important to have an understanding of their reasons. It could be for consolidation of debt, home improvement, or for a major purchase. It could also be for other personal or financial reasons, perhaps taking a loan for cash to purchase a car. Some purchases may be used for deductions on interest payments on the tax return. It is always wise to consult a tax attorney, accountant or financial planner prior to making those decisions.
Benefits of NMRC
The foremost objectives of the NMRC is to bridge the funding cost of residential mortgages by promoting the availability and affordability of good housing through increased access to liquidity and longer-terms funds in the mortgage market.
Mortgage financing through NMRC would also extend maturities for Nigerian home-buyers to as much as 20 years. This means that a longer period of payment would result in a lower amount in repayments on a monthly basis.
The NMRC is also expected to help push down the interest rates for mortgages in Nigeria, from 20 percent currently, to 13 – 14 percent, helping to make mortgages more affordable for prospective home buyers.
What to be aware of when refinancing
Borrowers need to be aware that some mortgage companies may include pre-payment penalties in the loan contract. Offered as a clause in the contract, they may require a penalty payment if the property is refinanced or sold prior to a specified date. While most lenders do not insert penalties for pre-payment in the contract, there are some less than reputable lenders who impose excessive penalties – sometimes as high as 85% or six months of interest on the original balance of the loan. It is important to learn what penalties may be in the contract prior to signing. Employing the services of a professional real estate consultant would ensure that your interests are protected.