When it’s a Good Idea to Refinance - and When it isn’t
Home loan refinancing is often misunderstood as being only for people who are struggling to make ends meet. And while it's true that refinancing can offer financial stability to those who are overburdened, it has far wider applications that typically go unexplored.
In fact, refinancing can be used by virtually anyone with equity in their home for all kinds of financial advantages.
So what exactly does refinancing entail? When is the right time to refinance your home, and when should it be avoided? Find out in our short guide.
Looking for a competitive car loan? Get a Free Finance Assessment.
What is home refinancing?
Home loan refinancing is moving your current home loan from one lender to another for a financial benefit.
Home loan refinancing can be used to simply reduce the burden of mortgage payments, or it can be used to free up capital. Capital can be used for any number of reasons, such as renovating your home, buying an investment property, or buying a new car. If you've had your eye on the benefits of property investment, refinancing could help you achieve your goal.
Many people also wish to refinance a home loan to free up capital to pay out defaults, or to pay off a credit card. Refinancing can allow you to roll these debts into a single payment. So instead of paying several bills, you consolidate them into one monthly payment that covers all your commitments - car loans, credit cards, everything.
Example of Home Loan Refinancing for Financial Benefit
You're paying off a home loan, car loan, and credit card and want to undertake renovations:
Current Commitments
- Home loan of $300,000: $2,300 per month
- Car loan for $30,000: $660 per month
- Credit card with $2,500 limit: $65 per month
- Total Commitment: $332,500
- Total Monthly payments: $3,025
Current Commitments (Before Refinancing)
Extra funds required for renovations
- Home renovations: $15,000
- Previous Commitment: $332,500
- New consolidated loan amount: $347,500
- New total monthly repayments (after refinancing): $2,192.75
Commitments (After Refinancing)
Total monthly saving: $832.25
Total saving per year after refinance: $9,987.00
Please note; The above examples are for illustrative purposes only. An initial rate of 8.47% applies to the mortgage, with a term of 30 years (as the initial mortgage). The rate on the new loan is 6.5%. Refinancing could allow you to secure a lower rate. Additional fees and charges may apply, dependent on your individual circumstances. Interest rates may be subject to change throughout the term of the loan.
Advantages
A great reason to refinance a home loan is to get a better rate on your mortgage repayments, freeing up monthly cash flow.
In addition, you may be able to get a better interest rate by refinancing. Many people with less than perfect credit histories initially look to bad credit home loans to get onto the property ladder - but many do not realise they are not locked into these mortgages.
If you're in this position, after 12 to 18 months you may be able to refinance with a different institution to get more favourable rates and terms. This is because you’ve demonstrated more than a year of good payment history, which financial institutions look upon favourably. So it may be that lenders are now more willing to look beyond past indiscretions and offer you a refinancing option that suits you better.
Disadvantages
Consolidating your debts will give you a lower monthly commitment, but you will pay it out over a longer period - typically 30 years. So you'll need to balance the benefit of more cash in your pocket today versus a longer payment period.
An increased term means more payments and more interest, so you could end up paying back tens-of-thousands, if not hundreds-of-thousands, in additional payments over the 30 years.
Still confused?
Don't worry - we can help. Rapid Finance has helped countless customers free up capital through home loan refinancing. Call us today on 1300 476 274, and we'll be happy to offer friendly advice on the best options for your circumstances.
Call 1300 467 274 to discuss your situation today.