Do you know what refinancing a home loan is? It is when a borrower takes out a new loan to replace their current loan.
Homeowners may opt to refinance their mortgage for various reasons. For example, some may want to decrease their monthly payments by getting a lower interest rate. Others may want to shorten the length of their loan, which can lead to higher monthly payments but allow them to repay the loan sooner. Additionally, some homeowners may refinance their mortgage to access the equity they’ve built up in their home, which can be used for renovating, consolidating debt or other expenses.
With the ever-changing interest rate environment in Australia, it’s important for homeowners to stay informed and review their home loan options regularly. This is to ensure you are getting the best deal. It’s important to speak with a financial advisor and compare different loan options and mortgage services before making a decision.
How Refinancing Works
To know what refinancing a home loan is, you need to understand how it works.
The primary motivation behind refinancing is to secure a lower interest rate, reducing the monthly mortgage payments. However, there are other reasons to refinance, such as altering the loan’s term or utilising the equity accumulated in one’s home. When thinking about refinancing, keeping a few key points in mind is important.
- When you apply for a new mortgage, the lender will need to verify your creditworthiness and ability to repay the loan just like they did when you first applied. This includes checking your credit score and income and evaluating your debt-to-income ratio to ensure you can make the payments on the new loan. In other words, the lender will want to ensure you are a responsible borrower before approving your new mortgage.
- When you refinance a property, you will be required to pay certain expenses known as ‘closing costs’. These can include fees for property appraisal and title insurance. These expenses can be substantial, so it is crucial to consider them when determining whether to refinance. Some lenders may offer refinance options that don’t require closing costs, but these loans usually come with higher interest rates.
- You will be given a new loan term when you refinance your mortgage. The outstanding balance on your mortgage will be spread over this new term. For instance, if you choose to refinance into a 30-year loan, you will have 30 years to pay off the remaining balance on your mortgage fully.
Benefits of Refinancing
Homeowners can greatly benefit from home loan refinancing. It can help them save money, pay off their mortgage quicker and access extra cash for other expenses. However, it is crucial to weigh all the options and consult mortgage services experts to make the best decision. Some of the benefits to refinancing a mortgage in Australia include:
- Lower interest rates: One of the main reasons people refinance their mortgages is to take advantage of lower interest rates. This can result in significant savings on interest payments over the life of the loan.
- Shorter loan term: Refinancing can also allow borrowers to shorten the term of their loan, which can result in paying off the mortgage faster and building equity in the property more quickly.
- Consolidating debt: Refinancing can also be used to consolidate other forms of debt, such as credit card debt or personal loans, into one manageable loan with a lower interest rate.
- Accessing equity: Refinancing can also allow borrowers to access the equity in their property, which can be used for things like home renovations, investing in other properties or other large expenses.
- Changing loan features: Refinancing allows borrowers to change the features of their loan, such as switching from a variable rate to a fixed rate, or adding or removing features like offset account or redraw facility.
- Improved cashflow: Refinancing can also help improve a borrower’s cashflow by reducing their monthly mortgage payments.
Things to Consider Before Refinancing
The question is not always ‘what is refinancing a home loan’, but sometimes it’s simply ‘how can I refinance’. When considering refinancing, it is important to consider the cost of the new loan compared to the potential savings. This includes the interest rate and any fees associated with the refinance process. You also need to consider how long you plan to stay in your home, as the longer you plan to stay, the more likely it will be that the savings from a refinance will outweigh the costs.
If you’re evaluating a loan or any mortgage services, make sure to consider the repayment period. A shorter term can lead to higher monthly payments, but it can also save you money in the long run by decreasing the overall interest paid on a loan. Conversely, a longer term may result in lower monthly payments, but it will also mean paying more interest over the loan’s lifetime. Therefore, it’s crucial to weigh your budget and long-term financial objectives before determining the loan term that’s right for you.
Refinance with InvestorFi
The refinancing process entails credit evaluations, income verification and closing expenses. Thinking about the long-term financial effects is as crucial as talking to a financial advisor or mortgage expert before deciding to refinance. The potential benefits of refinancing include lower monthly payments, a shorter loan period and the ability to access cash through cash-out refinancing.
At InvestorFi, we aim to assist Australians in realising their aspirations of owning a home. We firmly believe that by equipping individuals with the necessary knowledge and resources and fostering a sense of belonging, we can guide them through the intricate process of the property market and mortgage services, as well as assist them in obtaining the funding they require to turn their dream into reality.
If you’re ready to refinance, contact us today. We will help you get started.