When Should I Refinance My Home Loan?

March 14, 2018

When Should You Refinance Your Home Loan?

Refinancing your home loan could be a great way to save money, but you need to time it right. There is no limit to how many times you can refinance your mortgage. However, just because you can, doesn’t necessarily mean you should.

Here’s the thing. When you switch to a new loan, you could potentially save thousands in interest by changing to a lower rate. You may also be able to pay down your loan faster with the right features or lower your monthly repayments to help you manage your budget.

On the other hand, you’ll also have to cover the costs of refinancing every time you go through the process. Another risk is your credit; if you don’t qualify for your new loan, you may end up hurting your credit score when you apply, which can make it even more challenging to qualify for a competitive loan in the short-term future. Multiple inquiries into your credit history can make you appear like a riskier borrower.

The key is to know when to refinance your home loan. And yes, there is a sweet spot.

It’s a good idea to evaluate your mortgage about once a year to make sure it’s serving your financial situation and to decide if the timing is right for refinancing. Even with an annual check-up, you’ll still probably only switch loans every few years. A recent survey found that 61% of Australians refinance every five years.

Use this guide to decide if right now is a good time to refinance or if you should wait. Knowing exactly when to refinance can help you avoid costly mistakes and could save money in the long run.

Find Out If There Is an Early Repayment Penalty

Before even starting to compare rates and looking at the offers different lenders have, check to make sure you won’t have to pay a penalty for renegotiating your loan. A lot of mortgages include penalty clauses, which means that a penalty will be applied if you try to pay off the mortgage early, which is what happens when you refinance, and your new lender pays off the old mortgage.

Be sure to find out the following;

  • If a penalty fee is included in your home loan contract
  • If the penalty is a fixed fee or a percentage of the loan balance
  • How much will it cost?

Because the amount of the fee could be large, you definitely want to look at your contract, check the details, and calculate the exact amount. It could end up costing you more than what you’d gain by refinancing, which is an indication that now is not the time to change to a new loan.

Consider the Value of Your Home

One thing a lot of people don’t consider before refinancing is home value changes – until they’re already well into the process and may have spent money to apply for a new loan.

With property, values are constantly moving – the real estate market is always shifting with prices rising, plateauing, falling, stabilising and rising again. This means, a few years after you take out your mortgage, it’s quite possible that the value of your home will have decreased.

While you may have had a lot of equity a year or two ago, you may not have enough now to handle the new loan. For instance, if your home has decreased in value, then:

  • You may no longer have enough equity in it to get a new mortgage.
  • You may need to pay LMI, which will increase the cost of refinancing by thousands of dollars
  • Your payments could be higher than they were before.

Look at current home values on the market – have they gone down or up?

You can also pay a professional to do a valuation of your home. If you aren’t sure what your property is worth, paying a couple hundred dollars to get a reasonably accurate assessment of your home value may prevent you from making a costly mistake by trying to refinance at the wrong time.

Research Current Interest Rates to Know When to Refinance

To save on interest, you’ll want to refinance to a loan with a lower interest rate. This means you’ll need to pay attention to current market rates to see if it may be a good time to refinance now. You want current rates to be lower than the rate you are paying now. Financial experts recommend determining when to refinance by:

  • Waiting until the rate is at least a half-percentage point below what you have now.
  • Keeping your eye on interest rate trends.
  • Watching to see when they start to drop, but not waiting for too long.
  • Locking in your rate when it is at the rate you are sure it will be profitable to refinance.

Decide How Much Longer You Will Live in Your Home

Knowing how long you intend to live in the new property will also help determine when to refinance and still profit. Consider the following about the future:

  • Do you plan to stay at least as long as it will take you to recoup your costs for the new mortgage?
  • Do you plan on having more children? Will you have to move in a few years anyway if your family increases in size?
  • Are you nearing a point where the kids have grown up, and you may downsize to a smaller home in a few years?
  • Have you considered moving for your career?

Think about life changes over the next few years. If you end up moving before you recoup your refinancing costs, this could destroy any savings you may have gained.

Think About Shortening the Term

Many people think about getting a shorter term on their new mortgage. This often looks attractive, and it will help some people because it can:

  • Reduce the interest rate.
  • Reduce the amount of interest paid over the life of the mortgage.
  • Raise the amount which is paid off each month.

When deciding on a time to refinance, you will need to determine if you can comfortably afford the increased cost. After all, you don’t want to take on more than you can handle and end up having to take on personal debt just to keep up with a higher repayment.

Determine the Overall Costs and Compare

Before buying into what appears to be an attractive deal on a home loan, take some time to determine the total costs involved. Understanding all of these figures will tell you when to refinance your home and how to get a good deal. This means considering:

  • All fees
  • Interest
  • Early repayment penalties
  • Getting a reassessment on the house, and more

When to refinance? This can only be determined by carefully considering all the details of your situation and comparing the home loan you already have with the other options available. Selecting the right options can enable you to not only know when to refinance but will also let you potentially save thousands of dollars and give you more financial freedom each month with lower payments.

Written by Refinancing.com.au

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