5 Ways Refinancing Your Home Loan Can Help You
We take a look at 5 ways refinancing your home loan could help you:
1. Your Lender’s Rate Is No Longer Competitive
We will start with the popular first. One of the main reasons people choose to refinance their loan is to get a lower interest rate and put more money in their pockets instead of paying the banks.
Done right, refinancing your home loan could save you thousands of dollars over the life of your loan and free up cash now.
2. You can switch between fixed and variable rates
Another popular reason to refinance your home loan is to switch between a variable rate and a fixed rate. With a fixed fee, some want peace of mind. That is, knowing exactly how much your monthly repayments will be without the possibility of it changing over a given period is worth a slight rate increase.
Rather, you may decide that you would like to take advantage of a lower variable rate, as you can accept the risk that rates will increase in the future.
3. You may be eligible for a home loan with better features.
There are some great home loan features right now, and refinancing could offer you the opportunity to take advantage of more flexible features. Some money saving features to look for are:
Flexible refunds: You may want to switch to a home loan that allows you to make balloon repayments without fees or open an offset account to lower your interest.
Redraw: Allows you to withdraw additional payments if you need cash. Look for a loan that offers free repayments.
There are some pretty cool boutique features too, like getting a paying vacation (a break from payments) or loan portability that lets you take your home loan with you when you move out without much hassle.
4. You could consolidate your debt
Many of us have multiple debts, like a car or a credit card, along with our home loan. Often times, our auto and credit card loans carry quite high interest rates, which means more money out of your pocket.
Refinancing could give you the opportunity to merge your debts and potentially lower the overall interest you are paying, simplifying all higher interest debt into lower interest debt and lowering your monthly payments.
The interest rate on a home loan is usually significantly lower than that of other types of credit. Helping you save on interest charges and pay off your debts sooner.
5. You could release some equity in your current property
Perhaps you are thinking of joining the thousands of Australians who have invested in property, renovating their home or touring Europe on the trip of a lifetime. Since your current home is often your most valuable asset, it only makes sense to release as much of your home’s equity as possible.
Home equity is the difference between the current value of your home and your mortgage balance. For example, if your home is worth $ 600,000 and you have a mortgage of $ 200,000 left, your home’s equity is $ 400,000. That is money that can be used to build wealth.
Not so long ago, the only way homeowners could access their home equity was to sell and upgrade to another property. These days, home loans are flexible and it is possible to gain access to the equity in your home without having to sell. Reviewing your home loan can help you see exactly how much equity is available to you, and refinancing can help you access equity to use for other things.
What should I consider before refinancing?
Refinancing cost
While refinancing has some surprising benefits, there are costs associated with refinancing your home loan – costs that can outweigh the potential benefits. Below are two of the main costs associated with refinancing:
Exit fees
Exit fees may apply when you pay off a loan early, usually in the first three to five years of its term. It could be a percentage of the remaining loan balance or a fixed fee. See your loan agreement for more details. Although exit fees have been prohibited for new loans contracted after July 1, 2011, they may still apply to loans contracted before this date.
Borrowing costs
When you refinance, your new lender may charge a variety of fees up front. However, not all lenders charge these fees, and some may be negotiable.
Case study
Let’s take a look at an example of refinancing using a few numbers to better understand the benefits and costs.
The situation:
Sue has a loan of $ 300,000 repayable over 25 years. His current rate is 6.4% and his monthly repayments are $ 2,006.
If Sue can refinance a loan with a 5.9% rate and a 0.50% rate reduction, she can reduce her repayments to $ 1,914, a savings of $ 92 each month.
The solution:
Looking at the cost side, we will assume that Sue will pay $ 1,000 to refinance her loan. In this case, it would take Sue about 11 months ($ 1,000 divided by $ 92) to recoup the costs through the savings she makes.
The result:
That’s not a bad time frame. If it takes several years to recover your costs, refinancing may not be helpful.
Should you refinance?
We have discussed the potential benefits of refinancing, the associated costs, and a brief example. That’s a lot to take in. When it comes time to make a decision about refinancing your home loan, the best suggestion is to sit down with a mortgage broker you trust to help you weigh your options.