You have likely heard of the term Refinancing or Debt Consolidation, Right?
Are you wondering if you could pay less for your mortgage or home loan and if there are ways to cut your expenses each month?
When Australian homeowners think about how to lower their interest rate they readily consider a refinance to a better home loan.
After comparing Rates, fees & repayments with a finance broker; in many cases, debt consolidation means that you get a lower interest rate than your original mortgage placing you in better control of your debt.
That being said; remembering to take the comparison rates into consideration.
In an effort to manage their debt; Some people refinance to expand the life of the loan and have lower monthly payments even if they may not get a significantly lower rate.
In this article, we present to you (as the homeowner) the pros and cons of refinancing for a home loan to help you determine if it is a suitable option.
So what are the Advantages of Refinancing?
For many property owners, the advantages of refinancing outweigh the disadvantages. These are the top benefits:
Switch to a Different Type of Rate
If your original mortgage has a variable interest rate, you may decide that you want the stability of a fixed price. Some Australians do not like the stress of worrying about interest rate fluctuations, and they may not want the responsibility of tracking trends that affect those rates.
This type of switch is especially beneficial if your finances are tight and leave little room for surprises. You will find that it is easier to plan your monthly budget. When you switch from an adjustable rate, you also have the peace of mind that comes with added predictability and stability.
Get a Lower Rate to Save Money
When you qualify for a significantly lower interest rate, you may save several hundred dollars each year. If you have a family or a limited budget, you know how far that money can go for school supplies, clothes or even a small family vacation.
That savings could also mean that you have money to save for a car, a college fund for your kids or anything else that you may need to pay for in the future.
Another strategy that many homeowners use is to switch to a lower rate to pay off the home sooner. For example, imagine that you refinance and end up saving $250 per month with a considerably lower price. If you add that amount as an extra payment toward the mortgage every month and try to contribute extra whenever possible, you can pay off your balance sooner.
Utilize Your Home Equity
Are you familiar with how home equity works?
If not, it is the difference between your loan balance and the home’s market value. If the value is higher than what you owe, you have equity. You can actually use that money if you wish with some loans, and you will have a reduced equity balance after you refinance.
For example: If your home is worth $500,000 and you still owe $250,000, you could access up to $250,000 for whatever you need.
Many homeowners who choose to use their house’s equity invest in renovations or improvements on the property to increase the value even more.
What are the Potential Pitfalls of Refinancing?
In some instances, refinancing may not make sense. These are some of the potential disadvantages that could make it not worth the time or investment.
Costs may Outweigh the Benefits
If refinancing may not save you a considerable amount of money due to only a slight interest rate decrease, it could cost you more in the end if the costs are high. In addition to other closing costs, there are several types of fees such as:
- Early repayment fees
- New mortgage registration fees
- Old mortgage discharge fees
- Deferred establishment fees
- Break fees
- Valuation fees
While not all of these expenses may apply to you, it is essential to know which ones would if you should decide to refinance. A knowledgeable broker can help you determine what types of fees you might face.
If the expenses outweigh the savings, it is not a good time to refinance. However, in some cases, certain incentives may be available from some lenders to help make refinancing more affordable.
An Equity Reduction puts you at Risk
If you choose to refinance to utilize your home’s equity, you will lose some financial cushioning. For example, if you use your home’s equity now to make improvements, buy a new car, take a lavish vacation or make another non-essential purchase, you may realise that you need money for medical expenses in a few years and may not have much equity then.
If you do not already have another financial cushion for unexpected expenses in the future, it may not be wise to use your home’s equity now for non-essential purchases.
Mortgage Insurance may Resurface
If you have significant equity in your home, you may enjoy the benefit of not having to pay lender’s mortgage insurance. When you switch loans and lose equity in your home, you will likely have to pay LMI again.
LMI protects the lender from losing money if you are unable to repay the loan. If your loan balance exceeds 80 per cent of your home’s current market value, you may have to pay LMI.
In some cases, this may increase the cost enough that a new loan may not be worthwhile. However, some homeowners who switch loans within the first two years get a partial refund of their LMI premiums.
You can discuss your plans with a broker to see if you will pay LMI or get any refunds if you decide to refinance.
Another instance in which you will have to think about LMI is if your home has lost value. If you have been paying your mortgage for some time, but your home’s decreased value has pushed your balance close to that threshold, the LMI could be an unexpected and unpleasant surprise. LMI is one of the most important things to be sure about before you sign any papers to refinance.
Are There Other Considerations?
Depending on your unique situation, there may be other advantages or disadvantages. For example, if you refinance to access your home’s equity and use that money to consolidate high-interest debts, you may wind up paying more over time.
In that case, it may make more sense to use a short-term consolidation loan for some debts and transfer your credit card balances to a card with an introductory zero-interest period. Rolling high-interest debts with shorter original terms into a long-term loan even at a lower fixed rate can be costly over time.
A good broker can help you determine if you can find less expensive solutions in such a case. Also, a broker can help you pinpoint other advantages or disadvantages that may be unique to your situation.
Is Refinancing Right for You?
After reading this, does it sound like the advantages would apply to you more so than the disadvantages? If so, a good broker can review your consideration to refinance, potential lenders and financial issues with you.
Not all lenders will inform you of fees, closing costs, LMI and other possible expenses thoroughly before you commit to refinancing.
At Quantum Finance, we make it our goal to ensure that you understand every expense before you make a new financial commitment.
We have access to all major and minor banks & lenders to ensure the best refinancing loan terms possible. Please contact us if you have questions about refinancing.