Top Reasons to Refinance Your Home Loan Now


July 26, 2017

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Thinking of refinancing? The typical Australian home owner switches to a new loan every four or five years. While many borrowers are after a lower interest rate, there are several other strong reasons why a refinance could be a smart financial move right now.

Take a look at these top reasons to change your home loan. If one (or several) could help you achieve your financial goals, the cost of refinancing may be well worth it.

A Better Interest Rate

The top reason home owners revisit the mortgage lending market is to secure a lower interest rate to help reduce those monthly repayments. Bringing down your monthly mortgage payment by a $100 or more can help you pay off other bills, invest, or simply give you more financial breathing room.

This is often a beneficial move when you still have quite a few years left to pay down your mortgage. The larger the loan you have to pay off, the bigger the difference a lower interest rate will make. If you’ve already paid off a lot of your loan, it may not be worth it to refinance for a lower rate. It will take a long time for the difference in your repayments to cover what fees you paid to refinance.

For example, with a current balance of $400,000 on your loan you’ve been paying for four years, switching from a fixed 30-year mortgage with a 4.2% APR to one with a 4.0% APR, you could save nearly $200 a month – almost $2,400 a year. Keep in mind, unless you reduce the term of your loan, you will end up paying more over the course of your entire loan when you refinance. On the other hand, if you pay down your mortgage ahead of time, with a lower rate, you’ll save on your monthly repayments and you’ll lower the total cost.

Access Home Equity

This is another popular reason for refinancing. It makes the most sense when you have built up a lot of equity in your home and have paid down a significant portion of your debt. Keep in mind, you’ll save on lender’s mortgage insurance if you refinance for less than 80% of the property value.

When you switch loans, you can use your equity to invest in property, the stock market, or other investments to help build your wealth. It can also be used to cover the costs of renovating your home, which will add value to the investment you already have.

Debt Consolidation

If you are juggling several existing debts, refinancing can be a frugal move. Even more so if those debts are high-interest credit card debt. You can change loans, refinancing for a larger mortgage so you’ll have enough to pay off your other debts with your home loan. Then, you’ll have one monthly repayment to worry about. Some people find consolidating debt makes it easier to manage their finances. You’ll also be able to save on interest if your mortgage rate is lower than your interest rates.

One consideration, however, is that you may still pay more overall, depending on the term of your loan. If you were paying off a short term personal loan, folding that debt into your 25-year mortgage could mean you pay more in the long run, even with a lower rate. It’s important to do the calculations to determine how much you’ll save with a lower rate, how much you’ll have to pay each month, and how much you’ll pay overall depending on the term of your refinanced loan.

Different Loan Product

Some people may benefit from switching from a variable rate to a fixed rate loan, or vice versa, depending on what interest rates are doing. This can also be helpful depending on your financial preferences. For example, you may want to switch to a fixed rate for the certainty of fixed repayments for a set period.

When you refinance, look for the loan features that you may be interested in. Now that you’ve been paying down your loan for some time and are an experienced borrower, you may realise you wish you had opted for certain features when you first applied for a loan, like redraw, a free offset account, and flexible repayments. When you change loans, you get a second chance to ensure they’re in your loan product. You can make your loan better tailored to your financial life.


Written by Refinancing.com.au

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