Has Switching Your Home Loan or Refinancing Crossed Your Mind Recently?
It’s common to try and switch to a new home loan and see if you can save money. Your current home loan could be too expensive, or too hard to keep up with the repayments. Your situation has probably changed since you first borrowed the money. So why should your home loan stay the same?
When you are thinking about your different options, you could also be thinking about the risks and cost of switching home loans or refinancing. It can be time consuming and expensive, but finding a new loan which is tailored to your situation should save you in the long run.
Why Should I Switch My Home Loan?
Switching home loans can potentially save you a lot of money including thousands of dollars in interest. Switching to another loan can also mean being offered different features that are more fitting to your new situation
So Where to Begin if You are Thinking of Refinancing?
Compare and Shop Around for New Home Loans:
Loan comparison sites give you a quick overview of which loans are on the market. But keep in mind that the cheapest loans aren’t necessarily the best. Have a look at the features offered by the new loan, and the interest rate and fees that incur with switching to the new loan. A mortgage broker will help you choose the right loan for you. They will consider your entire situation while finding a tailored loan for you. They should be able to find you the best deal.
When you have identified the loan that best suits your situation, ask the lender for a key fact sheet. A key fact sheet will give you an idea of what the loan offers, making shopping easier for you. The key fact sheet will state the repayment amount that is due over the life of the loan.
When you have found a loan that is ideal for you, ask your current lender if they are willing to provide an alternative loan. Be sure to tell them that you are planning to switch to a cheaper loan from another lender, they may offer you a better deal.
Know Your Wants and Needs:
Many features that come with new home loans can look very appealing. Don’t be fooled into thinking it’s the right choice, before weighing up your expectations. It’s not worth paying a higher price for features that you don’t need.
Switching from a variable rate loan to a fixed rate loan or vice versa may also be a good reason to consider refinancing. The fixed rate offers protection to the borrower even if the interest rate fluctuates.
Instead of extending your loan with a cheaper rate, you can also refinance your loan to shorten the loan term. It’s common for many Australians to switch from a 30-year home loan to a 15-year home loan. Borrowers who are willing to pay a bit more in order to get rid of the debt faster usually favour this loan.
Save Money with an Offset Account:
Offset accounts are a common feature of home loans. They are a great way to save thousands in interest. A mortgage offset account is a savings or transaction account that is linked to your home loan. The amount in this account is offset against your home loan and you will only be charged interest on the difference. This reduces the amount of interest you pay and can knock years off the length of your home loan.
For example, let’s say you had a loan of $400,000 with $50,000 in a 100% offset account, you will only be charged interest on $350,000.
What to Consider Before Getting a Refinance?
The Cost of Refinancing:
At the end of the day you could save a lot of time and money depending on your reason for refinancing. However there is no escaping the fees and costs associated with refinancing. Refinancing can be expensive, so make sure you are aware of all the costs of switching home loans.
The accumulated cost in interest can be larger with the lower repayment. Keep in mind that lower monthly repayments mean it will take longer to pay back the loan. The longer it takes, the higher the accumulated interest will become.
How Refinancing Can Impact Your Credit File:
Even if you have a decent income, good savings and job security, it doesn’t guarantee the approval of your home loan application. Applying for multiple home loans for which you are declined, will eventually affect your credit file. This is one of the consequences of not shopping around for a competitive mortgage. Some lenders will automatically decline an application when they see multiple inquiries. Keep in mind that placing multiple inquiries can lower your credit score.
Applying for a New Mortgage May Not be Easy:
Refinancing your mortgage may sound appealing, however they can be difficult to apply for. Refinancing could be tricky if your financial situation or credit score has changed drastically since you applied for your original mortgage.
Many mortgage lenders will not approve your refinance if your credit score has dropped. They may not approve it if you are not employed or if your income has decreased. They may also offer the mortgage at a higher interest rate than your original.
Mortgage lenders can be cautious when they decide whether to approve a refinance. You will need to complete a lengthy loan application. This allows the lenders to conduct a full review of your financial and employment history.
Will My House Lose Equity if I Refinance?
One of the benefits of refinancing your home is that you can access its equity. If the value of your property is rising, and you have built up strong equity, refinancing can allow you to access it. You could use this money for renovating, or even putting down a deposit on an investment property.
If you decide to refinance your entire current loan, right down to the closing costs, you will lose that amount in equity in your home. This is why it is important to consider all of the costs of refinancing.
How Long Does it Take to Refinance?
Refinancing your mortgage usually takes between 2-4 weeks. This includes the time taken to process your application and close your previous mortgage.
The team at Lanyana Financial Group have years of experience helping people refinance. If you are not sure whether refinancing is the right solution for you, or are experiencing financial distress, call us on 1800 534 534. We are here to improve your financial position and get you back on track.
First published on Positive Solutions Finance.