If you're a homeowner, chances are you have heard about refinancing your home loan. It usually involves replacing your current home loan with a new one, which can provide a range of benefits such as a lower interest rate or a more suitable loan structure.
According to Finder, an average Australian could save up to $3,192 annually by switching to a lower-rate loan:
☑️ A typical borrower refinances a loan amount of $496,161
☑️ An average variable interest loan is 5.61% while the lowest variable rate is 4.74%
If you have a 30-year loan term and decided to switch to a lower rate then you will be able to save about $266 a month. These are just estimates based on rates and averages as of February 2023 but you can save even more if you seek professional help from us at Auzcap.
Before you do that, there are several important factors to consider. This article will explore what you need to know before switching home loans.
Things to Consider When Refinancing
Refinancing your home loan can be a great way to save money on interest payments and reduce your monthly repayments. However, before deciding to refinance, it's essential to consider a few factors.
1. Assess your financial situation
First things first, you must take time to assess your financial situation, especially your current home loan setup. That means you must take a closer look at your current interest rate, the loan term, and the monthly repayments.
Are you fine with the amount that you are paying monthly? Can you afford it eventually? Is your monthly income enough to sustain you with the amount you must pay?
More importantly, do you have enough home equity to refinance? These are just some of the important questions you need to ask yourself before pursuing refinancing.
2. Know the cost of refinancing
Whatever decision you make, there will always be a cost at stake. The truth is refinancing your whole loan would bring you additional costs you have to pay - application, valuation, and legal fees. Take time to understand and figure out these costs before making a decision.
Another thing to point out, there might be a different interest rate that you will end up paying on the new loan. Just a slight increase in the interest rate alone could cost you up to thousands of dollars throughout the loan's lifetime.
3. Consider the impact on your credit score
Whether you like it or not, refinancing your home loan will have an impact on your credit score. That means the lender will perform a credit check when you apply for a new loan thereby lowering your credit score by a few points.
Additionally, the average age of your credit accounts will be lowered when you close your old loan in favour of a new one. Overall, it will have a negative impact on your score. Before making that decision, take time to weigh the pros and cons of refinancing with particular attention to the impact on the credit score.
4. Find the best deal
Don't settle for less, it's important to shop around and compare offers from different lenders by choosing the best deal possible. Check out lenders that offer competitive interest rates and reasonable fees. Consider working with a finance broker that can help you find the best deal based on your financial situation and unique preferences.
Loan Offered and Interest Rates
One of the main benefits of refinancing is the opportunity to secure a better interest rate. When it comes to interest rates, you'll need to decide whether to choose a fixed or variable interest rate. Fixed interest rates provide certainty and stability, while variable rates can offer more flexibility and the potential for lower repayments.
Impact of Interest Rates
Interest rates play a crucial role in determining how much you'll pay back over the loan's lifetime. The higher the interest rate, the more you'll pay interest charges. This is why it's important to understand how interest rates work and how they affect your repayments.
Here's a simple example: Let's say you take out a $10,000 loan with a 5% interest rate over the next five years. Your monthly repayments would be around $188 and you would end up paying over $11,284 over the loan's lifetime.
So what if the interest rate goes up?
This would be the scenario: Imagine the interest rate doubles to 10%, your monthly repayments would be about $212 and you would end up paying a total of $12,714 over the loan's lifetime.
It clearly shows that any slight bump in the interest rate would make a huge difference in how much you pay back in the end.
Fixed or Variable?
Another thing you must consider when taking out a loan is choosing either fixed or variable interest rates. The former stays the same over the loan's lifetime while the latter can change over time based on market conditions.
Fixed interest rates provide stability and predictability as your repayments will always be the same. Variable interest rates can be more flexible as these can go up and down. That means you won't benefit at all from the lower rates while your monthly repayments increase when rates go up.
Loan Features
If you come to think of it, getting the most out of home loan refinancing is all about taking advantage of your current loan features. That means you have to make sure that it would suit your needs and financial situation.
Depending on the loan amount and term, it will have a corresponding effect on your monthly repayments. With that being said, you have to carefully choose an amount or term that would work well for your budget. Consider what you can comfortably afford to pay every month.
Interest-only loans can be really attractive as they allow you to make lower repayments for some time. However, it’s important to understand that you’ll only be paying the interest on the loan during this time and not the principal. This means that you’ll need to be prepared to pay more once the interest-only period ends.
Take note that you are also required to pay lender mortgage insurance (LMI) when you’re borrowing more than 80% of your home’s value. As LMI can be very expensive, you can avoid paying it by – saving for a larger deposit or getting a loan with a guarantor. By considering these loan features, you can choose a home loan that best suits your needs and helps you achieve your financial goals.
Personal Debts
Bear in mind that having other personal debts, especially credit cards, would have a significant impact on your ability to refinance your home loan.
We all know that your credit card debt will affect your credit score, which in turn becomes an important factor in getting approved for a home loan. High credit card balances can also affect your debt-to-income ratio, which is another factor that lenders consider when assessing your application.
It is also possible to consolidate all your debts – credit cards, personal loans, and car payments – through refinancing. It would simplify your repayments and potentially reduce your overall interest rate thereby helping you save money over the long term. It’s important to consider the fees involved in the consolidation of your debts so you can comfortably afford the new loan repayments.
At the end of the day, assessing and consolidating your debts through refinancing can be a smart financial decision. However, you still must carefully consider the costs and ensure you’re making your financial situation better than before.
Monthly Repayments
Refinancing your home loan can help you lower your monthly repayments, which can free up extra cash for other expenses or savings goals.
When you refinance your home loan, you may be able to secure a lower interest rate or longer loan term, which can result in lower monthly repayments. This can be especially beneficial if your financial situation has changed since you first took out your home loans, such as a decrease in income or an increase in expenses.
Another thing you need to do is calculate your potential savings from refinancing before making any decisions. There are online calculators you can use to determine how much you can save on your monthly repayments through refinancing. If you’re unsure, you can always speak with a finance broker. Keep in mind that while lower monthly repayment can be appealing, you should also consider the overall cost of the loan over the long term, including any fees associated with refinancing.
More importantly, there will always be changes in your financial situation, such as future income changes or major expenses. That means your monthly repayments and refinancing would be positively or negatively affected. By carefully considering all these factors, you can make an informed decision on whether refinancing is the right choice for you.
Switching Home Loans
It can be a good option to switch home loans if you’re looking to save money or find a loan that better suits your financial needs. However, it’s important to carefully consider the terms and conditions of any new loan before making the switch.
Make sure you review the terms and conditions of the loan agreement by focusing on the interest rate, loan term, repayment options, and any additional fees or hidden charges. You must fully understand what you’re signing up for and ask questions if anything is unclear.
When you’re making the switch, there will always be exit fees or penalty charges before the end of your current loan term. These extra costs will add up quickly and eat into any potential savings from refinancing, so it’s important to consider them in your decision-making process.
As much as there are rewards and benefits when switching home loans, there will always be potential risks and disadvantages that you have to deal with.
Here is one possible scenario: when you make a switch to a variable-interest-rate home loan, expect repayments to increase when interest rates rise. At the end of the day, you have to weigh the pros and cons of switching home loans before making any decisions.
Final Thoughts
We all know by now that switching home loans can be a great way to save money and improve your financial situation. However, it’s important to carefully consider all the pros and cons involved in refinancing and ensure that you’re making the right decision for your financial future. Doing all the research and asking the right people for professional advice matters so you can make an informed decision and find the best home loan that will suit your needs and unique circumstances.
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