When you buy a house, chances are that you have calculated exactly how much you can afford in the way of repayments for your mortgage. But at the same time, what is true today may not be true five years from now.
Financial, personal, and professional situations inevitably change. So, even years after signing your home loan and purchasing your property, you may realize that you can no longer afford the monthly payments necessary to stay in good credit.
In that case, refinancing becomes a viable option. That is, of course, as long as you know exactly what this type of action entails.
Understanding Refinancing of Mortgages
Refinancing, in essence, means getting a new mortgage that replaces your existing one. The new lender typically pays off the balance of the home loan, then offers a new mortgage that covers the existing debt on the house.
Why would anyone engage in this type of activity? The answer is simple: borrowers can get sometimes significantly reduced interest fees out of it. Lower interest rates, on the other hand, can save homeowners tens of thousands of dollars over the course of a mortgage.
On the other hand, it’s a complicated process that many homeowners simply don’t want to touch. How do you know whether refinancing your home loan is the right decision for your individual situation? Your Mortgage breaks down the various scenarios in which you should or should not take this step, depending on your current needs and desires.
When Refinancing Makes Sense
More specifically, the website has outlined 5 major scenarios in which refinancing your mortgage could make sense:
- Your current lender’s rate is no longer competitive, as the country’s economy has improved to a point where average interest rates are significantly lower than they were when you signed for your home loan.
- A major change has occurred in your financial situation, and you are no longer able to afford your existing payments. A change or loss of job, for instance, could result in this type of need.
- Your financial situation might not have changed, but you need money for a major financial event – such as sending your child to college, or your home undergoing major renovations.
- Your existing mortgage is variable, and you want to switch to a fixed rate for more financial stability and in the face of a potentially changing economic market.
- You want to consolidate your debts, particularly after incurring large credit card (or other debts) that need to be paid off quickly and effectively.
Don’t just hunt a lower interest rate. Instead, consider your current scenario, and ask yourself whether refinancing actually makes sense for your needs. You don’t want to lock yourself down for a potentially longer mortgage if the financial short-term benefits are minimal.
When You Should Keep Your Existing Loan and Structure
Refinancing, as implied above, does not always make sense for your needs. In fact, here are 5 scenarios in which you shouldn’t take that step, also outlined by Your Mortgage.
- You won’t own the property for much longer. In that case, it doesn’t make much sense to tie yourself down to a new contract that might complicate the sale.
- Your mortgage term is almost complete. Refinancing tends to lengthen the repayment period, so it makes sense to refrain from it more the closer you get to the final payment.
- Your existing mortgage includes high early repayment penalties. Some home loans allow you to pay back the balance above regular repayments early. Others, on the other hand, charge fees for doing so. If the fees are too high, lower interest rates may not be worth the change of loan.
- Your income is not necessarily reliable. Freelancers, for instance, should refrain from refinancing. The less secure your month-to-month income is, the more sense it makes to stay with a repayment period that’s as short as possible.
The Variables of Mortgage Refinancing in Australia
Each of the above scenarios can help you better decide whether refinancing is actually the right decision for you. But of course, making that decision is only the first step in making sure that your decision is actually beneficial, both financially and personally.
Your next step should be to find a reliable vendor. You will come across countless companies vying for the right to buy off your mortgage and offer new terms. Some, however, are not necessarily credible. Do your research to make sure that the lender you sign up with will faithfully serve you, and keep its original terms as agreed at signing.
Another step is to consider all potential fees that would come into play during a refinancing opportunity. Additional taxes and stamp duties, for instance, might apply. Before signing the new home loan, you have to make sure that you know exactly what fees you will incur, and that you can afford to pay them.
Finally, it makes sense to work with external professionals if you are unsure about any of the above variables and consideration. Buying a home may be the largest financial decision you make in your life. Refinancing it, of course, is almost as significant. Don’t take this step until you feel that you have a good grasp of all involved variables.
In the right situation, and with the right lender, refinancing is a sound and mutually beneficial financial decision. However, that’s not a guarantee. Only understanding its nuances can help you take the right steps to secure your financial future and keep your home affordable