8 Signs You Should Refinance Your Mortgage
If you’re looking to reduce the interest on your loan, pay a major expense, or shorten your loan length, refinancing your mortgage can be a smart move.
Refinancing is the process of taking out a new loan, which has better terms that improve your finances, to pay off the debt of the old loan. Whilst refinancing can have transaction costs, ultimately, it allows you to save money on interest costs and lower your monthly payments.
Whether you’re interested in cashing in your home equity or you just want a little extra money at the end of the month, here are eight signs it’s time to refinance.
1. Interest Rates Are Dropping
The lower the interest rates go, the less you’ll pay every month. The good news is that the RBA has been pushing interest rates lower due to several key factors (e.g., unemployment rates, low inflation, etc.).
Banks are not required to pass the entire savings down to their customers, but many do pass a portion. The Australian dollar recently got a bit of a boost from a rise in inflation, which may stop the cash rate from dipping as low as .5% (as originally thought), but the rates are still low enough to make refinancing a good long-term option for homeowners.
2. You Want to Convert to Fixed-Rate Loan
A variable-rate mortgage can be attractive at first, but some owners can quickly tire of the constant back and forth. Because variable-rate mortgages sometimes offer lower interest rates to start, homeowners may be surprised at just how much they end up paying over the course of the loan.
Instead of having to worry about the next fluctuation, a fixed-rate loan can be a great way to predict your payments month after month. And considering interest rates are low right now, it’s a great time to lock in more reasonable terms.
3. Your Credit Score Has Improved
A credit score refers to the analysis of your financial history and essentially qualifies your likelihood of whether you’ll pay back the money you borrowed. The more likely you are to pay back a loan, the less likely it is the lender will have to absorb the costs of selling the property.
If you’ve proven over time to be reliable, refinancing is a way to either remind your lender that they can ease the terms or find a different lender who recognises your worth.
4. You Want a Shorter Loan Term
A shorter loan term refers to reducing the time you have to pay off the mortgage. While it may increase your payments in the short-term, it will save you money overall. That’s because the longer your loan is, the more you’ll pay in interest.
If you’re in a more stable financial position than when you first purchased the home, replacing a 30-year loan with a 20-year loan can save you thousands of dollars, even if you’re unable to negotiate a better interest rate.
5. You Want to Access Equity
Home equity is your most valuable asset. It refers to just how much of the home you own. So if your home was $250,000 and you put down $50,000, you would have 20% equity of the home. Refinancing gives you the opportunity to give up that equity in exchange for its relative cash value.
So while you’ll owe your lender more money down the line, you can use your equity in the short-term to pay for anything from college tuition to home improvements, to retirement funding.
6. Your Monthly Payment Is High
Mortgage payments can eat up plenty of your paycheck if you’re not careful. If you can lower your monthly payment through a lower interest rate, you can potentially free up a significant chunk of change.
When you refinance, you lower the principal and interest payments because you’re now paying off a smaller loan over the same period of time. So if you’ve already paid off $40,000 on a $200,000 home and a 30-year mortgage, you’re now paying interest on $160,000 over 30-years. This extends the life of the loan, but it meets a short-term fix if your monthly payment is too high.
7. You Plan to Live in Your Home Longer
Refinancing is often recommended for people who plan to stay in their homes for quite some time. This is because refinancing can be expensive. However, refinancing can still be beneficial if you’re not leaving anytime soon. The initial costs may be big, but there’s a good chance you’ll be stockpiling far more savings over time.
8. You’re Not Happy with Your Current Lender
By comparing lenders, you may find that some can give you better benefits than others in the form of interest rate, terms, customer experience, or features.
This year’s Deloitte survey on customers’ view on sharing banking information, respondents said that switching banks is not as difficult as people might have originally thought. With 33% of customers still having pain points with their current lenders, a number of customers are already considering changing providers in the next 12 months.
Conclusion: Is Refinancing Right for You?
Before refinancing, you need to define the reasons why, do your research, and delve into what this means for your financial position.
If you think it might mean you’ll waste money and increase risk, refinancing might not be for you. To give you peace of mind, Shore Financial is here to help. Speak to an expert to know where you stand.
Disclaimer: This is general information only and should not be taken as financial advice. Please speak to a Shore financial planning professional before making a decision on your home loan.