Are you planning to refinance a home loan for a lower interest rate or reduce the monthly mortgage payments?
If you think that you aren’t getting the best rates from your home loans, refinancing is the next best option.
If you are ready enough for this next step, then you can start collecting the details and preparing for refinancing the loan.
When you want to refinance existing home loan, you must be fully aware of all the ins and outs.
In this blog, let’s look at everything you need to know for refinancing a home loan right from the benefits and risks to the steps to refinancing.
Refinancing is replacing an existing mortgage with a new home loan, usually to reduce monthly interest rates or change to a different loan program.
Sometimes, when you are having additional home renovation or revamping costs, you can refinance the home loan to support yourself financially. Some people also go for refinancing home loans to pay off other debts.
No matter what the underlying purpose is, refinancing home loans is the same as the first time you obtained your mortgage.
There are several advantages to refinancing your home loan.
a. You can save some serious money
This is one of the popular reasons why many people refinance their home loans. When you refinance, you can lower your interest rates and save a significant amount of money.
Let’s say that you have taken out a home loan for $300,000 at 5% over 20 years. You will be paying an interest of $1980 every month.
Now, let’s consider that your interest rate is reduced to 4.9%. Your monthly payment will decrease by $17.
It may not seem a lot, but when you calculate the amount of money you save for 20 years, it comes down to $4080, which is a significant amount.
If you have taken out a loan for more amount, then your savings from refinancing will also increase accordingly.
b. You can repay your mortgage faster
Often, repaying your mortgage sooner than you planned is the best thing that you can do for yourself.
When you refinance your home loan, you can reduce the duration of your loan and save up for the remaining time.
Even cutting down the duration of the loan even for a year means saving thousands of dollars off your mortgage.
c. You can get your finances back on track
Haven’t we all been through rough patches in our life financially? Well, here is one time when you can escape such bad financial times.
Even when you have a bad credit history, struggling in arrears or pay off debts, refinancing your home loan will give you some breathing space.
If you have huge credit card debts with high-interest rates, refinancing on that debt will help you save loads of money!
d. You could get access to better features
Sometimes, when you are taking out a mortgage for the first time, you may have to compromise on some loan features.
But now that you’re in a position to refinance, you can get a loan with good features that offers flexibility.
You can get extra repayment options, offset accounts to minimize the interest rate and bundle up the separate loan charges into a package fee with discounts on the interest rate.
If you want to know about how to refinance a home loan, follow this seven step-by-step guide.
Step 1: Look at the cost of your current home loan
First of all, think about why you want to refinance your home loan. Is it to lower your interest rates or to ramp up the payment period or to get access to better features?
You can get access to your current loan details online and then think about why you want to refinance it.
Understanding the fundamental reasons for refinancing will give you clarity as you move towards the next step.
Step 2: Ask your current lender for a better deal
This is one action that many people overlook. Before you go around asking other lenders to refinance, you can first approach your current lender.
Your current lender will be highly motivated to retain you, especially when they have gotten good profit out of your previous mortgage.
Just get in touch with them and tell them that you’re looking to refinance. Ask about what options and lucrative deals they will offer, considering that you already have a mortgage.
Make sure to thoroughly research your refinancing the loan and see how much of a good rate you can get.
If you have been repaying properly and being a good borrower, you will have good options to make for refinancing.
Step 3: Compare home loans
This is a critical step. Even after you have gotten a good rate and terms from your current lender, you can go shopping and get a few quotes.
Compare the home loans from different borrowers. Take a look at the interest rates, loan features and other add-ons and look at the long-term benefits.
Step 4: Check out how much it will cost to exit your current loan
When you’re refinancing a home loan, then mostly you will have to pay a discharge fee. Though it wouldn’t be more than a couple of hundred dollars, it’s best to be aware of the exact cost.
You can call the lender and get the details of the break costs. You can use a refinancing home loan calculator to get the relevant details of how much it will cost you.
Step 5: Look at the costs of moving to the new lender
When you move to a new loan, there will be some upfront costs of the new lender. Again, you have to contact your new lender to get the details of the application fee, valuation fee, settlement fee and any other costs.
Some lenders could even waive some fees or offer to cover the price for the payment of leaving the previous lender.
So when you are made aware of the fees, make sure to get such offers.
Step 6: Apply for your new home loan
After getting all the details and making a choice, it’s time to apply for a new home loan.
The application process varies depending on the lenders but there are a few basic details that everyone will ask for.
You need to have a valid ID proof, details of the financial stability like income, assets and liabilities, and other bank payslips.
You should provide the details of the previous loan and the repayment history as well as the information on the current property.
One of the common questions that many have is, “How long does it take to refinance a home loan in Australia?”
While most lenders are trying to complete the refinancing process as soon as possible, it may take around 30 to 45 days for the valuation of the property and assessment of your previous home loan.
Step 7: Exit your old loan
Of course, switching your old home loan would be the last move! This is comparatively easier than the previous steps.
You need to inform your old lender and exchange all the relevant information with the new lender.
While refinancing your home loan is a good option, there are times when this move could end up wrong. Here are some situations when you should think hard twice before refinancing.
a. If you have a fixed rate home loan
Some lenders will offer a fixed interest rate for the first five years. During this period, even when you refinance your home loan, your repayment rate wouldn’t change.
b. If the set-up costs outweigh the savings
When you break a loan before its term, you will have to pay an early termination fee that can be high.
If you’re on a variable rate, there wouldn’t be any early termination fee. But it doesn’t mean that there won’t be any high rates for transferring your loan to another lender.
c. If the new loan has high fees
There are some fees as you set up a new home loan as we saw in the previous section. Apart from those fees, you may also need to pay the stamp duty fee and Lender Mortgage Insurance (LMI) in rare cases.
If you are supposed to pay for it, then it can cost you thousands of dollars.
d. If your new lender doesn’t offer the service, you need
Most people refinance by only looking at a low-interest rate. While it’s alluring, a cheap home loan may not have the features or services you need.
You wouldn’t enjoy the flexibility in the home loan with extra repayments and will get caught up in the situation.
After considering all the pros and cons of refinancing, if you think this is the best way to go, then good for you! As you walk through this new step, let’s take a look at some of the common refinancing mistakes and how to avoid them.
Mistake #1: Not locking down a fixed rate
After seeing a low-interest rate offered by a lender, you apply for a fixed-rate loan.
Once you apply for the loan, there is a settlement period for the lender to pay out for your property.
Do you know how long does it take to refinance a home loan?
Well, it can take up to 90 days for the lender to pay the settlement.
During this time, the interest rates can change and your final settlement amount can become different from the initially promised one.
Solution: Many lenders offer a ‘rate lock’ feature for free or a fee in which you can lock the interest rate usually for up to 90 days. This duration is enough to get your settlement.
Mistake #2: Waiting too long to refinance
Time is critical when refinancing. You may look at the reducing interest rates and feel that waiting for some more time may bring down the prices even further.
While it can seem all too exciting, you never know the direction of market trends. You may end up paying too much more than you anticipated at first.
Solution: Not waiting for a long time to refinance. You can look at the trends over a few days and lock in the interest that’s at an all-time low in the week. But don’t wait for several months for refinancing the loan.
Mistake #3: Adding years to your home loan
It can be tempting to add more years to your repayment period and relax your monthly payments.
But what’s actually happening is that when you extend the term of loan repayment, you end up paying more interest.
Solution: It’s best to stick on the current period of your home loan even when you’re refinancing. If you can afford to reduce the term period, then go for it!
Mistake #4: Refinancing when your home has fallen in value
Usually, the value of the home only increases. There are very few instances where the home value decreases.
However, this isn’t a gamble you want to take on when your home has fallen in value.
When you apply for a loan, your Loan-to-Value Ratio (LVR) will determine the interest and terms of the lender.
When your home has reduced in value, it can increase the LVR and it can mean that you need to pay a second time for the lenders’ mortgage insurance that could cost you a considerable amount of money.
Solution: Before you refinance your home and approach a lender, conduct a valuation of your property and see if it has increased in value after you bought it.
Mistake #5: Being wooed by “honeymoon” rates
Many lenders advertise low-interest rates to woe borrowers. What you don’t notice is that these interest rates are variable and the lender can increase the interest rate once the honeymoon period is over.
You may end up paying a steep interest rate after this initial period, which may even be more than what you paid in your first home loan.
Solution: There is something called a comparison rate that compares the interest rate offered now with the interest rate it will revert to after the offer. You can compare both the interest rates and check if it’s worth refinancing.
Mistake #6: Not paying attention to the comparison rate
How much does it cost to refinance a home loan?
Comparison rate is the answer. A comparison rate considers the interest rates and fees and will give you a better idea of the home loan.
While you cannot entirely depend on the comparison rates, it will provide you with an insight about whether you can consider this lender or not.
But not many understand the importance of comparison rates and fall prey to the cheap interest rates advertised.
Solution: Simple! Find out the details of the comparison rate before you pick a lender.
Refinancing is mostly a smooth process. However, there are situations when refinancing could be tricky. It’s totally up to us to navigate this tricky path and get your mortgage refinanced.
a. Refinancing with bad credit
When you have a bad credit history, it can seriously impair the options of the lenders.
There are some specialist lenders who will allow bankruptcies and offer refinance. But you will have to pay a high-interest rate. So when would it be the best time?
Well, when you want to get on top with your loan repayments or want to extend the repayment period, then refinancing at high interest makes sense, especially with your bad credit history.
Also, don’t miss out on reassessing your credit history and see if there are any errors that you can have removed by the credit provider. This would help you to get better interest rates for refinancing.
b. Refinancing in arrears
There are times when you aren’t able to meet your current loan repayment. You may be going through a rough patch and may find yourself cornered with no way out.
At this point, you can contact your current lender and try to see if you can refinance with them. If not, you can look for external lenders.
Keep in mind that the interest rates will be higher when you are refinancing in arrears. But, it’s better to pay more towards the home loan instead of defaulting.
If you are looking for a reliable and understanding lender to refinance your home loan at low-interest rates and best features, then check out Loan Waves.
We help you devise an excellent refinancing strategy to save on the monthly repayments. Contact us to get a free consultation with our refinancing experts and discuss the best way to figure out your home loan repayment.