Five tips for refinancing your home loan
A great way to refresh your finances to suit your current lifestyle better is to refinance your mortgage.
Consider the following tips to ensure that you refinancing experiences are not too strenuous and go along as smoothly and painlessly as possible.
- Estimate how much you can save- will you really be better off?
Most borrowers look at refinancing as an opportunity to improve their financial situations, be it by lower interest rates, or by gaining benefits of financial features offered by the new loan.
However, it is essential to do research and calculate the actual difference caused by refinancing.
Often, despite a lower rate, you may not save money as you maybe stung by switching charges, or ongoing fees. Also, with most fixed rate mortgages, you may have to pay break costs to leave.
Hence check for all terms and conditions, additional fees or costs, and then weigh in on whether the refinancing will actually make a difference.
If your objective is making use of your equity, consider whether it will leave you better off. If you are planning to rent out the current property and buy a new one, or simply looking to upgrade to a bigger property, ensure that the plan is affordable.
- Look beyond the bottom line and compare what the different lenders are offering
A lower interest rate alone can be tempting to go for a loan switch. However, if a lender looks perfect on papers, it is not essential he is suitably perfect for your situation too. There might be certain aspects to their services, which may not have been taken into account.
For instance, a few low interest rate lenders are often online lenders. They operate only electronically and there will be no branch to visit. Are you sure you want to get into a loan deed over the Internet?
Moreover, financing with the bigger banks comes with its own benefits of access to transaction and saving accounts, credit cards, etc. So maybe, their slightly higher rate of interest offers more value for your money.
- Could consolidating debt help your finances
If your monthly budget goes haywire due to loan installments, you may consider switching to lower interest rates for a lower monthly installment. However, weigh carefully whether it is the mortgage that is causing the crunch or your other debts. Then see which of the debts is creating the problem before switching into a new loan blindly.
In instances where you are running multiple loans, you may refinance to consolidate all your other debts into a mortgage. This will swap multiple installments into a single monthly payment. However, turning your short term debts into long terms one isn’t always risk free. For instance, if you add your high interest rate credit card bill to the mortgage, chances are that the interest you’d pay for a few months was much lower than what you’d pay over 30-years despite a lower rate of interest. Hence, look for a consolidate mortgage where the lender allows you to split the balances, to pay them off separately under the same rate of interest.
- Consider fixing your rate
If the RBA raises the cash rate, chances are that the benefits of refinancing your mortgage may be lost. If you do not turn out lucky, you may end in a situation worse than your initial loan with your refinanced mortgage.
You could ask whether the lender would fix the rate for a few years when refinancing, to ensure that you at least reap benefits of the switch. It depends however on you, as fixed rate mortgages can also be less flexible. So, choose wisely.
- Beware of honeymoon rates
A few lenders may be offering you negligible interest rates or heavily discounted ones as they like to call them to refinance your mortgage with them. Some of them offer to lock the rate for a fixed time after the switch. However, as soon as this period ends, chances are that the rate would spike exponentially.
These extremely low rates are termed as Honeymoon rates as they are likely to spark a long-term commitment, however, they won’t last too long. Hence, before choosing to switch, check on all terms and conditions, and only then make your decision.