Before making a decision on refinancing, understand the cost to change your loan and lender. The general goal of refinancing is to get a better deal and save money over the life of the loan.
10 Reasons to Refinance
- Save money on interest cost
This is the most common reason for refinancing. A 1% drop in interest rate on a $500,000 loan equates to a significant $5,000 savings in one year.
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2. Lowering your repayments and paying off your home faster
Changing from a 30-year loan to a 15-year loan will raise your monthly payment, but over the span of your loan, you can save thousands of dollars
3. You want to access the equity of your home
If you have built equity in your home, you can release this equity in the form of a cash out. Cash out can be used to fund renovation and upgrade your home or to pay off debts or accomplish other goals.
4. Interest rates may be lower than when you first bought
As a broker I’ve seen this so many times when banks attract new clients with very low rates and yet neglect existing clients by not providing them with the same competitive rate. When you refinance the balance on your loan at a lower rate, you can reduce your monthly payment and the total cost of your loan.
5. You want to switch from a principal and interest repayment to interest only
Switching to interest only reduces your monthly repayments. This could allow you to free up some more money for other monthly expenses. An investor client of mine is expecting his living expenses to increase in the next 6 years as his kids are commencing private school soon. Switching to interest only on his investment loan to help with his cashflow makes sense.
6. Your credit score has improved
It is possible that your financial situation and credit history wasn’t that great when you took out your home loan a few years back. If your credit score has gone up substantially from when you took out the loan, you may qualify for a better rate.
7. Consolidation of debt
This is a common reason for anyone refinancing their home loan. If you are one of those experiencing financial difficulty, a consolidation of debt may relieve the pressure. By refinancing to consolidate your credit card and personal loan debts, you can focus on having one single payment for all your loans. Refinancing to consolidate debts only makes sense if you are consolidating your multiple high interest rate debts into one lower interest rate loan.
8. Cash out for investment purposes
If your property has increased in value, accessing the equity of your home to buy an investment property or to invest in shares to build further wealth also makes sense. More often, lenders require a letter from the accountant or financial advisor.
9. Unhappy with your current lender
You may be motivated by a bad experience and finding a lender with great service will be key
10. Release the equity of your home to fund a motor vehicle purchase or a lifestyle purchase such as boats and caravans
This is my least favourite reason to refinance. Why? Because these are purchases that depreciate over time. It does not make sense to buy a motor vehicle and finance it together with your home loan on a 30-year loan term. Can you imagine still paying the loan another 20 years on a motor vehicle that has no value at all in 10 years’ time? A good finance broker who keeps his/her client’s best interest at heart will consolidate personal loans, car loans and credit card debts into one loan on a 5-year loan term or less and at a lower rate.
Today’s home loan market is very competitive, and there might be a loan out there, offering the features and flexibility you want. Before you make any decisions, however, be clear on your reasons for refinancing. Refinancing can be a serious financial decision with a number of variables to consider. A good broker can help establish the type of loan that may work best for you, how much you can borrow and any extra features you want. They can then gather information from many different lenders and help assess the costs and benefits associated with each loan.
As well as doing the legwork for you, they can guide you through the refinancing process and apply their knowledge and understanding of mortgages to help you achieve the best outcome if you decide to go ahead.
Maria Papa is a senior property and finance expert specialising in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection. She has offices in Sydney, Melbourne, and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Your full financial situation will need to be reviewed prior to acceptance of any offer or product.