Do you remember the first instance when you took out your first home loan?
It was a tiresome process, spent in researching a number of loan options so that you could secure a mortgage that best suited your needs and pocket.
So, now that you have secured it and bought the home of your dreams, it makes a good financial sense to keep reviewing your home loan at least annually. This will ensure that it is still meeting your needs and providing you with the features or interest rate which had attracted you in the first place.
Everything changes and with time you might realize that your loan no longer offers the same features and flexibility that you once had. This might be one of the reasons why you might think of refinancing.
Hence, here are some things that you need to know to understand what is involved in refinancing your home loan so that you can decide whether it is the right step for you.
Refinancing can aid you in achieving important financial and personal goals. So, let us have a look at some of the most common reasons for refinancing a home loan.
- It is true that refinancing can help you get a home loan at a more competitive priced with a different lender. The loan interest rate should not be the only factor to consider because it might be that you are paying for features you don’t need or use on your current loan. If you feel so then you should get in touch with your Mortgage Broker who can compare hundreds of loans to see if you could save money by refinancing.
- Refinancing helps in streamlining debt management. The interest rate on a home loan is usually lower than other types of credit. This gives you the benefit of saving on interest charges and helps you in paying off the debt sooner. However, remember that debt consolidation can turn a short term debt into a long term one. Unless you aim to pay off the newer and bigger home loan quickly, consolidation of your debts could mean paying more interest in the long term. You can use a Budget Planner Tool to work out where you can cut down on your expenses to be able to free up cash for additional loan payments.
- Refinancing can be a great way to tap into your home equity and invest in important areas such as investment property, shares, or managed funds.
- You can refinance to achieve personal goals like going on a holiday, paying for your kid’s education, home improvements and much more.
Steps To Refinancing The Right Way
Before you go ahead and refinance you need to be aware of the steps involved in the process. Here is what you need to know. When you are to get refinanced, you first need to determine your ‘borrowing capacity.’ Here are some factors that will determine your borrowing capacity.
- Your income: This is one important factor that will determine your borrowing capacity even when you’re refinancing. That is why your earnings should be able to comfortably cover your regular living costs as well as your loan repayments.
- Your financial commitments: Lenders will look at this factor to calculate what you can pay. For doing so, they will take things like credit cards and personal loans into account.
To help you with determining your borrowing power, you can always use the Borrowing Calculator and see how much you may be able to borrow.
If you decide to opt for refinancing, you should have your paperwork ready with you before you start talking with lenders. This can help you to speed up loan approval. The paperwork that you may require are:
- Income proof
- Recent six months of statements for any existing home or personal loans
- Recent rates notice and building insurance policy on the property offered as security
- Your most recent strata notice
The Pros And Cons
Refinancing does not only save you money, but it also has costs involved. This is why you should sensibly weigh all the pros and cons. This means comparing the costs to benefits , ensuring that it really is the right move for you. Some of the key costs that you might face when refinancing are:
#1 Borrowing costs
Your lender might or might not charge you a range of upfront fees when you refinance. However, in case he/she does, here are the most common fees as listed below.
- Loan application fee charged during settlement of loan
- Valuation fee, for a professional valuation of the property
- Settlement fee charged for the payout of your current mortgage
#2 Lender’s Mortgage Insurance (LMI)
Remember that you may be asked to pay an LMI if you ask to refinance for 80% or more of your current homes. LMI is an insurance that protects the lender if you are unable to meet your home loan repayments.
#3 Break costs
If, at present, you own a fixed rate loan, then check if you owe breaks costs. For knowing this you can call your lender, who will be able to tell you whether break costs apply and what you are likely to be charged.
#4 Mortgage registration fees
These fees are applicable when you choose to switch from one home loan to another. This will let the State Titles Office know you have changed either your lender or the type of loan. Mortgage Registration fees vary according to your State or Territory. You can take the help of the Stamp Duty Calculator to know about the mortgage transfer fees that apply to your area.
There are no strict rules about the time when you should refinance your loan. However, financially it makes sense to review your home loan at least once a year or when your circumstances have changed.
Whatever your circumstances, a free appointment with an expert mortgage broker will enable you to know whether you can benefit from refinancing. It will cost you nothing and could save you thousands through improved loan features or a reduced interest rate. All the points mentioned above will help you know what you need to about refinancing.
Choose well, enjoy a free financial life.