Consider all the factors before making a decision
You might ask, ‘Why would I swap my home loan for another one?’ The short answer is, because it can save you time and money. Let’s do it, you say, but there are several important factors you need to consider before diving headfirst into negotiations.
Homeowners want to refinance their mortgages for several reasons. A new loan’s interest rate might be significantly lower than your current mortgage rate – which means lower monthly repayments. You might want to shorten the term of your mortgage so you’re debt-free sooner. Your credit score may have improved, making you eligible for a lower interest rate, or perhaps you want to shift from a floating to a fixed-term rate.
All valid reasons for wanting to refinance, but the question is, should you – and is there a right time?
Is refinancing a good choice for you?
While refinancing might be an option, you need to figure out whether it’s a good one for you and your financial situation.
Situations where refinancing might be the best idea – or not:
If you have additional high-interest debt, refinancing to consolidate that debt into one monthly payment might be a good idea. If the interest rate on a new mortgage is significantly lower than your existing debt, you could save big. A word of caution – if you can’t resist the urge to spend your money once you’ve refinanced, then you might want to consider other alternatives. There’s no point in ending up in even more debt after you’ve refinanced.
Even if it’s only one a year, making extra mortgage repayments can yield big results. Making additional repayments may be a better option than refinancing, especially if the interest rate difference isn’t huge. Just be sure to check the fine print of your mortgage agreement for any prepayment or closing fees.
Home loan term
Consider how long you have left to pay. If you’re able to refinance for a shorter term with a lower interest rate, then refinancing might be a go. But if you refinance for the same number of years or more, even with a smaller interest rate, the shift might not be worth it. It’s all about how much interest you end up paying across the full term of the loan.
Do it earlier rather than later
It’s generally a better idea to refinance earlier in your mortgage term because your payments are primarily going towards paying off interest. If you were to refinance in your later years, you’d be starting your mortgage all over again rather than building up the equity in your home.
How long you plan on staying
Lastly, consider how long you’ll be in your home. It can take a couple of years for the cost of refinancing to pay for itself, so it would only make sense if you don’t plan on selling in the next year or two.
Get yourself prepared to refinance
If you decide that refinancing your mortgage is the way forward, here are some tips on what to do in preparation:
Check your numbers
Don’t be fooled – just because you were granted a home loan once, doesn’t mean your application to refinance will be accepted straight away. At the end of the day, refinancing is the same as taking out any other loan.
Your lender will reassess your finances including your credit score, loan-to-value, debt-to-income ratio, any other debt and your job stability. You need to prove that you have enough money after your bills to finance the new home loan you’re applying for.
Factor in fees
No surprises here, but refinancing comes with fees – so make sure you know what they are and that you can afford them. Refinancing fees are usually between 3-6% of the loan amount and might include an application fee, loan origination fee, appraisal fee, inspection fee, home insurance and closing costs.
The savings need to outweigh the costs so it’s a good idea to calculate your break-even point. Figure out how long it’ll take for your refinance to pay for itself by comparing total refinancing costs against your per-month savings. The numbers need to stack up in your favour.
Call your mortgage broker
With so many factors to consider, your best bet is to work with a mortgage broker to refinance your home loan. You’ll get help about which lenders to approach and make sure your new loan suits your needs and financial obligations.
Most importantly, a broker can help you determine whether refinancing your mortgage is a suitable option for you. Make use of an experienced expert to make a wise financial decision.
Signing on the dotted line
Refinancing your mortgage is not a decision to be made lightly, but when done well, it can save you time and money. If it will reduce your mortgage repayments or the term of the loan, help you to build equity or reduce high-interest debt without getting into more trouble, then refinancing can be a great financial move.
The process of refinancing does take time, and there are costs involved. If the savings are greater than the cost, and you’re looking for expert help to get going, then give the team at Global Finance a call.