For many the buying of a home is the single biggest purchase they will make in their lifetime. Most will require finance in order to buy a home, but just because you already have finance and are busy paying off your home, your options don’t end there.
Home loans can be refinanced and in this article we will take a look at some of the reasons why you might want to consider refinancing your existing loan, as well as the cons in doing so.
Home Refinancing Explained
Home refinancing is about negotiating a new deal on your mortgage. It could be a case of striking up a new deal with your existing lender, or venturing out and finding a new finance company or bank to work out a new finance arrangement. Generally the existing loan is paid off with the finance from the newly-created home loan.
Now let’s look at some of the benefits to refinancing your home loan.
Lower Interest Rates
One of the main goals for anyone to seek refinancing is to get a better rate on the interest they are paying. Obviously the higher the interest rate, the higher the repayments are going to be each month. Then there is the subject of variable rates versus fixed rates to take into consideration. While for the long term most home loans work on a variable interest rate, some deals on new loans start off with the rate fixed for the first couple of years. Meaning, if the rates rise your loan repayments won’t be affected during that period. Conversely, if the rates fall, you also won’t reap the benefits of reduced mortgage payments.
Gain Access to Equity
This is also another common reason why people opt for refinancing their home loan. If you’ve been paying off your existing loan for some years, and perhaps have been paying back more than the minimum repayment as well, then you will have built up some equity. Refinancing with a new loan gives you the opportunity to access that equity if you so choose.
The equity could be used to:
- Start a property investment portfolio
- Finance a much needed holiday
- Buy a new car
- Home extensions or renovations
- Building a swimming pool
- Paying for the kid’s education
The list goes on….
Loan Repayment Security
This was mentioned earlier, but it is possible to negotiate a home loan with a fixed interest rate for the duration of the loan. This gives the borrower the security of always knowing what their repayment amounts will be each and every month. There will be no stressing about pending interest rate rises, or wondering what you will have to pay from one month to the next. Peace of mind is priceless, and refinancing with a fixed interest rate is one way of achieving a more stress-free home loan scenario. Variable rates can be scary at times in a volatile market, whereas a fixed rate definitely offers some security.
Adjust the Length of Your Mortgage
Refinancing your home loan enables you too be able to renegotiate the term of the loan. This can work both ways. You may want to spread the repayments out over a longer period, thus reducing your monthly costs. Keep in mind you will be paying more in interest and fees over this extended period, though.
Alternatively, many would like to get their loans paid off quicker, so the refinancing option can achieve this by shortening the term. This does come with the added stress of increased payments to be able to meet month after month, but the option is there. You will reduce the amount of interest paid as well as loan management costs. The biggest benefit, obviously, is you will get out of debt more quickly.
This has been mentioned, but it’s worth looking at in more detail. All loans – whether for homes, cars or personal – come with a series of fees attached. The amount of fees and the cost will vary from loan to loan and from lender to lender, but no loan is exempt from fees.
Every loan you apply for will come with an initial establishment fee; so even when you refinance, you won’t be able to avoid this one. However, you may find a loan with a lower establishment fee.And sometimes lenders will offer loans with no establishment fee whatsoever as a temporary bonus to get business.
Most loans also come with monthly and/or yearly management fees. It’s these fees that can vary the most and this is one area you can really capitalise on when refinancing. Over the course of a 25 year home loan you can potentially save thousands of dollars just through reducing these fees alone.
It’s definitely something to keep in mind when refinancing.
Having the ability to consolidate all of your debts into one simple monthly payment can really reduce financial headaches for most families, as well as potentially reducing interest paid overall as well. Refinancing makes this possible, by both negotiating a new loan and perhaps using your equity to reduce the overall amount of debt you owe.
Debts that can be consolidated include:
- Credit cards
- Home loan
- Car payments
- Personal loans
- Education loans
To name a few of the more common debts.
Your Financial Situation Has Changed
Recently there could have been a change in your financial situation. Your income may have gone up or been reduced. Either scenario calls for a serious look at refinancing your home loan. You may need to extend the length of your loan so the monthly payments are more manageable on a reduced income. Or, if you are riding high on a promotion or had a bit of a financial windfall, shortening the length of your loan and saving money on interest could be the best current option for you.
The Cons of Refinancing
Everything in life comes with some negatives as well, and refinancing is no different. It would be remiss to write an article highlighting only the positive aspects of refinancing your home loan, so here I’ll quickly cover some of the possible negatives to consider.
- Refinancing could result in you having to pay Lender’s Mortgage Insurance (LMI) a second time. This could potentially reduce the savings of refinancing as LMI is often quite expensive.
- If your credit rating has taken a hit in recent times you may struggle to get a better rate on a new loan, and therefore it could prove more financially beneficial to remain on your current deal.
- When you lock yourself into a new home loan, you may find yourself in a situation where you are paying off your home for an even longer period than you had originally planned. If you are planning to move any time soon, then getting a refinance deal right now is not the best option.
- Continual refinancing can add further damage to an already dented credit history. You want to keep your credit record as clean as possible, so something to keep in mind when considering refinancing your home loan.
- The more features your new home loan comes with, could add up to even more fees. Consider whether you really need the features being offered, and strip back anything that doesn’t benefit you.
Refinancing your home loan does come with many potential benefits, however, but there are also risks involved as well. Make sure you discuss the options with a qualified Mortgage Broker first so you really understand whether the decision to refinance will really be of benefit to you.
Also do your due diligence when seeking out a potential new lender. Read all the fine print and don’t commit yourself to any deals until you are confident you understand exactly what you are getting into.
If you do your homework, then refinancing your home loan can actually be a very positive, life changing decision.