5 Things To Know About Refinancing Your Home Loan
When it comes to home loans, refinancing may be an important option to explore at some point as you work toward paying off a mortgage. Australians carry a combined 1.3 trillion dollars in home debt, and home loans represent a significant financial challenge for many families.
The more you know about options for home loans and interest rates, the better equipped you will be to make savvy financial choices and position yourself for the best scenario to reduce your debt. This might mean refinancing your loan, and there are five important points to consider as you look at whether the refinancing process is right for you and your loan amount.
Define Your Why
Perhaps as a first time homeowner, you have never been in a position to consider refinancing or its benefits. A neighbour mentions she has recently refinanced the property next to yours, and you wonder if you should be doing the same.
The primary reasons Australians refinance their home loans include:
- More competitive interest rates
- Reduced fees
- Changes in payment schedule
- Debt consolidation
- Access to equity for home renovations and upgrades
If you can pinpoint the primary reason you want to refinance, you will be in a better position to discuss options for repayment with potential lenders. Spoiler alert: interest rates alone are not always the best reason to refinance.
If you have an entirely updated home, a mortgage with one of the best rates available, and a healthy amount of money in your savings, there may be no need to “fix what is not broken.”
However, if your interest rate could be improved or you need access to funds for a roof replacement, a refinance might be perfect for you.
Is it Worth It? Number Crunching Time
Refinancing your home loan is worth it when the numbers work, but this is not always the case for every borrower and every loan amount.
Before you proceed with a refinance, you will need to take the time to crunch numbers and ensure the repayment effort will be worthwhile. This includes reviewing:
- The terms of your current loan, including your interest rate and the time left to repay the debt
- The amount of time since you last refinanced (if you have done this before)
- Fixed options versus variable options.
Homeowners also need to consider other costs associated with refinancing. For example, in many cases, you will have to make a deposit in the form of equity in your property.
Typically, the amount will be around 20%, and if you do not have the required equity, you could end up paying Lenders Mortgage Insurance.
Other fees include valuation fees, settlement fees, and application fees, to name a few.
Comparison Shopping for Home Loans
Your existing lender is naturally the first place to start when it comes to comparing loans. Remember that they may have other home loan products available, and some borrowers appreciate the ease of staying in one place and not having to switch, especially when they can get a better and lower interest rate from their current lender.
Discuss your concerns and goals with your existing lender to see if they have something that aligns with what you want, and also consider other lenders and the products they offer as a comparison.
While interest rates are important, they are not the only factor to consider. As you look at various lenders, consider the factors outlined above and why you are interested in refinancing. Make sure you dig in and find out more about each lender’s fees, any ongoing fees, payment schedules, and more.
Sometimes a homeowner may be lured in by a lower interest rate but find that the fees over the life of the loan end up costing them more in repayment than other loans would have, which is why it is important to compare every detail when considering a refinance.
Comparison Shopping for Home Loans
If a considerable amount of time has passed since you first applied for a home loan, your property’s value may have also changed considerably—for better or for worse.
Remember that a lender will have your property valued, which is a significant step in home loan refinancing.
Homeowners can certainly do some work on their own beforehand to prepare for this so that there are no big surprises in the refinancing process. Pay attention to recent home sales in your area, and take advantage of online resources available to track your property’s value.
The increase or decrease in your property’s value will greatly impact your equity, which is particularly important to lenders.
What to Do If You Are Rejected
It is a surprise to some homeowners to face rejection in a home loan refinance application after having no trouble securing a home loan.
There are a number of reasons why this could happen:
- The homeowner’s credit score may have dropped significantly since last borrowing
- The debt-to-income ratio of the property owner may be so high that she is not a promising candidate as a borrower
- The property’s value may have decreased significantly, reducing the equity needed as a deposit on a refinance loan
If your refinance loan application is rejected, speak to the lender or home loan specialist to find out why so that you may address the problem areas and apply successfully in the future for a loan with a better interest rate and more attractive terms.
One important place to start is by getting a copy of your credit report to determine if it has errors that may be reflecting negatively on you and correct those. You can also work to pay down debt to improve your debt-to-income ratio and try to grow your savings accounts.
Find Out More About Refinancing Today
Derwent Finance offers a free refinance strategy session to help property owners better understand what options may be available and whether a refinancing home loan option is a good fit.
Our experienced mortgage brokers guide clients through every step of the basic home loan process, from understanding the available interest rates to looking at long-term costs to ensure they find the products they need to meet their financial goals and aligns with your current financial situation.
Contact us today to find out if refinancing is the best option for you.