Let’s look at the main reasons that people choose to refinance their existing loan so that you can decide whether this is a good option for you.
To Get A Lower Interest Rate
Obviously, one of the main reason that people refinance their home loan is to take advantage of a lower interest rate that may be offered by other lenders. This may sound great in theory but make sure that you check out all the fees and charges of both establishing the new loan and ending your current loan early to ensure that you’ll be saving money in the long run.
There are many online calculators which can allow you to calculate how much your new loan will cost and what fees and charges you’ll need to pay. You could also speak to a mortgage broker who would already have all this information on hand.
It may also be wise to speak to your current lender and tell them that you’re considering switching your loan to get a better interest rate. Often lenders will offer you some amazing deals in an endeavour to keep your business.
To Pay For Renovations
You may be looking at doing some major renovations to your existing home and want to access some equity to help fund these renovations. If you’ve had your home loan for a while, you may have established a considerable amount of equity which can be used to help pay for your intended renovations.
You may also consider refinancing to an interest only loan for a period of time so that loan repayments are reduced and you can funnel the extra cash into paying for the renovations.
A number of home loans also offer a construction loan option which will allow you to draw down funds to pay for your renovations. Before you decide to switch lenders, you may want to investigate whether your current loan has this option available.
To Consolidate Debts
Bear in mind though, that if you only make the regular required payments on your home loan, it could take 25 to 30 years to pay off and you could be paying way more interest on the consolidated amounts than you would have if you’d paid them off individually.If you’ve accumulated some debts over and above your home loan such as a car loan, personal loan or credit card loan, you might be considering consolidating all these into one loan so that you’ll have only one repayment to make and at a much lower interest rate.
A much wiser way to do this, is to try and make additional payments whenever you can so that you will indeed be saving interest in the long run. This means that your debts will be paid off much faster.
To Buy Or Build A New Home
You may be considering buying or even building a new home, either as an investment property or to live in yourself eventually. If your current loan is not a portable one, then it may be worth considering refinancing now to a loan which has a portability option.
This means that when you’re ready to sell your current home and move to the new one, your home loan moves with you. Doing this while you’re still living in your current home can save you time as you’ll already have enough to do when moving time comes around.
You might also want to consider a home loan which has a construction option if you’re building a new home. This means that you can draw down funds as you need them to pay the builder at the various construction stages. This, in turn, also means that you’ll be saving interest on the portion of the loan that you haven’t already drawn down.
To Give You More Loan Flexibility
You may be looking for some greater flexibility in your home loan now such as the ability to include an offset account or a redraw facility. An offset account can help you to save money on interest as the amount in this account at the end of the month is deducted from your total amount owing when the interest is calculated for the month.
A redraw facility can allow you access to emergency cash which you can use for repairs and minor renovations if you need them.
4 Situations When Refinancing May Not Be A Good Idea
Sometimes there are situations when refinancing simply does not make sense. These include:
- Your early payout penalties on your current home loan are just too high.
- Your credit history has been compromised due too some outstanding debts. In this case you may find it hard to source a good home loan at a low interest rate.
- Your work situation has changed and you now don’t have a reliable source of income which can be substantiated. For example you may have started working as a contractor or freelancer and you don’t get regular payslips.
- Your loan is close to being paid off and you’re looking forward to being debt free.
So now that you know your particular reason for refinancing and you’ve come to the conclusion that a refinance loan will indeed save you money in the long run, you need to make sure that it is the right time for you to consider moving to a new home loan.
Do your homework to ensure that your new home loan will provide you with the flexibility that you’re looking for and make sure that you have all the available information that you need to make an informed decision.
A mortgage broker can be a huge help in not only doing the calculations for you but can also give some really good options of which lenders may be ideally suited to your particular needs.