May 23, 2018
Sure, home loan refinancing could save you a lot of money. It could also lower your monthly repayment, giving your more financial flexibility to meet other financial goals.
Here’s the thing. You have a lot to gain if you’re smart about refinancing your home loan – but you also have a lot to lose if you end up running into common mistakes, like missing out on a lower interest rate or not understanding the costs involved.
How can you navigate the home loan refinancing process successfully and switch to a new loan that you can celebrate about?
Simple. You just want to ask yourself a few important refinancing questions to make sure now is the right time to refinance and that you are switching to the right home loan product for you.
Your interest rate determines how much it will cost you over the term of your mortgage to borrow money for your home. A lower rate, even a reduction of half a percentage point or more, can bring down your monthly repayment amounts and dramatically reduce the overall cost of your mortgage.
Look at your current interest rate. It may have changed since you first took out your mortgage if you are paying down a variable rate loan. If you are not sure where to find this, look on your latest mortgage statement. Another place you may find it is under Account Details when you log into your account information online.
Next, compare this rate to the current standard variable rate and other loans on the market. Is your rate similar to the rates on the market? Is it lower? In this case, you may not want to refinance now unless you have other reasons to switch to a different loan.
If you took out your loan a few years ago, it’s possible that lenders are offering better rates right now, especially if you happen to be with a lender who is not keeping pace with current rates on the market. With a lower rate, you’ll likely save a lot more than the typical costs of refinancing – but to be safe, you can use a mortgage switching calculator to get a better idea of how much less you’ll pay by refinancing to a lower rate.
Before you consider refinancing, find out the costs involved, such as exit fees or break fees if you currently have a fixed rate mortgage. You can do this by looking at your home loan contract. Check your terms and conditions. Then contact your lender and ask them about break costs or exit fees and how much these could be.
Will you have to pay lender’s mortgage insurance again if you refinance now? Calculate your expected loan to value ratio – if it is more than 80%, your lender may expect you to pay LMI, which would increase the cost of refinancing significantly.
Also, consider other expenses. Application fees and also home valuation and land registration charges are common. You also want to look at the account maintenance fees associated with your new loan compared to what you are paying now.
The number of times you make a home loan repayment monthly can reduce the term of your loan. Plus, it can lessen the amount of interest that you pay. This is because when you are making fortnightly, or even weekly payments, you actually make more total repayments in a year. With monthly repayments, you make 12 payments. With weekly, you end up paying the equivalent of 13 months each year because there are 52 weeks, not 48 weeks (12 x 4 weeks).
If you do not already pay your mortgage weekly, ask your lender if you can switch when you refinance. In fact, you can do this even when you aren’t refinancing to help you pay down your loan faster. However, make sure they are genuinely taking out weekly payments, not four payments a month, which some lenders do.
Most lenders have loans with money-saving features such as an offset account. These features could save you on the interest that you pay on your home loan.
An offset account links to your home loan via your savings account. What you have in your offset account reduces the amount of interest you owe. For example, a $245,000 mortgage with $15,000 in an offset account will only attract interest on $230,000. Such a feature could save you thousands over the term of your loan. In addition, it can enable you to pay your home loan off sooner. Look for these features when you are comparing lenders.
If you have debt and you are finding this difficult to pay, then some lenders will let you refinance to consolidate debt. Home loan refinancing can reduce your monthly repayments, and potentially save you money in the long-term. This saving occurs because your mortgage interest is lower than a credit card or personal loan.
Just remember to make extra repayments that cover the additional debt so you pay it off faster than the original term of your home loan. Otherwise, if you extend the term of your loan when you refinance for debt consolidation, you could end up paying more in the long run.
When you apply for a new loan, your lender is going to look into your credit just like when you took out your current mortgage. If your credit has improved since then, you should be in good shape to qualify for a competitive loan. If it has gotten worse – maybe you’ve made a couple late payments on your credit cards or you’ve recently increased your debt with an auto loan – you may not qualify for that attractive low rate to which you want to refinance.
Before refinancing, take a look at your credit file to check for any changes. It may pay off to take some time to reduce other debts or to build up a track record of on-time payments. This way, you’ll be more likely to qualify for a lower interest rate and get the most out of your refinanced mortgage.
By asking these refinancing questions, you’ll have a better idea of what you stand to gain when you refinance and what you need to look for in a new home loan. Then, you can safely compare lenders and make an informed choice. There’s a lot more to refinancing, however. If you have any questions, don’t hesitate to reach out to a refinancing expert.
Written by Refinancing.com.au
Refinancing.com.au is an end-to-end service that helps people refinance their home loan. We empower you to search for your home loan, and choose the process that suits you.
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