What is refinancing a home loan?
If you are looking to save some money on your home loan, it may be that you have to look for an entirely new one. Refinancing involves moving from your existing loan to a new one, negotiating better loan terms, interest rates and features that suit you.
Before beginning the process, however, it is important you get the full picture of what it means to refinance your home loan.
What is refinancing?
Refinancing, in its most simple of definitions, is the process of exiting your existing mortgage in lieu of a new one. The lender you apply with will use this new loan to pay off your old one, allowing you to move forward with only one mortgage to make payments on.
Most people choose to refinance in order to save money, which is achieved by finding a loan with more preferential monthly repayments and interest rates. However, this is not the only use for a refinanced loan, as accessing equity through refinancing can be incredibly useful to fund projects you wish to undertake.
What is the purpose of refinancing?
There are many purposes in starting the refinancing process, most of them focused on providing you the chance to start saving money and plan around your current financial obligations and goals. If you are thinking of refinancing your home loan, these reasons may help you start the process today.
Should you refinance your home loan?
Deciding on whether or not you should refinance your mortgage loans is a serious process that may take some time. You must consider your current financial situation, the goals you wish to reach through refinancing, how to find a new lender that suits you, and whether the current interest rate market is suited for the process.
See below for an overview of the possible advantages and disadvantages of a refinanced loan, allowing you to make a well-informed decision for yourself.
Refinancing advantages
There are various advantages to changing to new mortgage loans, especially when your find a loan that best suits you:
- Lower monthly payments and interest rate
- Your home equity can provide a source of additional funds
- Choosing to switch from a variable to a fixed rate loan allows you stability through predictability, as well as granting you potential savings
- You can set yourself up for a shorter loan term, saving you money on the total interest paid
- You can consolidate any debts you have into one loan
- To avoid any unnecessary fees, you may be capable of cancelling your private mortgage insurance premiums
Refinancing disadvantages
With every financial process there comes some disadvantages. Choosing a loan with a new series of terms, conditions and mortgage rates can be risky if done without research. There is a chance you may start losing money if you have not refinanced at the right time or with the right lender for you and your current financial situation.
However, by understanding the risks that come with refinancing, you can know what to avoid when choosing a new loan. These risks include:
- You stand the chance of reducing your equity held in your home
- If interest rates drop after refinancing, you may not get the benefits that come with a fixed rate home loan unless you attempt to refinance again
- You will have to pay closing costs
- The process of refinancing may take a substantial amount of time to finish; between 15-45+ days, look out for easy refinance options.
- Your loan term may be reset to its original length, meaning your total interest repayment over the term may outweigh what you save at a lower rate
- A shorter loan term means higher monthly payments, and, on top of that, you may have to pay closing costs on the refinance.
How to refinance a home loan
Beginning to refinance a home loan is not too different from setting up your first mortgage loan. Refinancing, after all, is just the process of changing from your current mortgage to a new one. A full guide to the refinancing process is available on our website.
How does refinancing work?
Refinancing is a term that applies to the negotiation of and exchange to a better mortgage for you. It does not necessarily have to be done with new mortgage lenders. You may also look to negotiate with your current lender for a loan that suits your needs from now and into the future.
Much like setting up your first mortgage, a lender will assess your finances and determine whether or not you are eligible for the loan you desire. The loan may come with new terms for your loan repayments and, hopefully, a lower interest rate. It may also reset your repayment clock, however, if you sign up for a loan with a longer repayment period than what you currently have.
The process is bound to come with costs as well. You have to determine whether you are capable of covering these fees before you begin to refinance, as some of them come from upfront fees and closing costs for your current loan. Furthermore, you need to know what type of refinance loan you will be applying for.
Examples and types of refinancing
Depending on what you want out of the refinance process, you can choose from various different types of refinancing options. It is beneficial to explore each type to see what best suits you.
Check out a few examples of different refinancing situations below, or get in touch with our loan specialists to see how refinancing can benefit you.
Cash out refinance
A cash out refinance will allow you to use your home to withdraw cash. This type of refinance is known to increase your remaining debt, but can give you accessible funds at that moment of time. During the cash out refinance process you may also gain a new term and a better interest rate.
Refinancing with an offset account
If you had extra cash or savings, this type of refinance would allow you to refinance your home loan with an offset account, giving you the ability to link the savings to your mortgage. This way, the positive balance of your savings can offset your outstanding mortgage balance, in turn reducing your repayments.
Refinancing to consolidate debt
A consolidation refinance is similar to cash out refinance, only the cash out gained from your equity is used for repaying other types of debt that are not mortgage related. Your debt will increase due to this type of refinance, but you can pay off other debts and even take advantage of the potential mortgage interest deduction.
Refinance fast with Homestar Finance’s Easy Refinance
The refinancing process can be quick and easy, with less paperwork, if you go with Homestar Finance’s Easy Refinance process. If you have your documents ready, you can have your approval ready within 3 days.
The refinancing process
The refinancing process can be lengthy, but once you have a clear idea of how to begin, it is a lot simpler than it looks. We will walk you through each step so you can comprehend just what refinancing your home loan means for you.
Assess your existing loan and financial situation
This is not only a step to determine whether you are ready or not to begin refinancing, but also to make sure you pass all the criteria that qualify you for new mortgage loans. Any lender will look at your:
- Current income and employment history
- Credit report, including score and history
- Equity that you have available in your home
- Repayment history of your current loan
- Debt obligations you have
- Home’s existing value
It is vital you ensure all of these criteria are up to your new lender’s standards, which may take time if you need to improve your credit card balances or clear any debt you have. Once you have these affairs in order, however, you can move onto the next step.
Compare interest rates and other terms
It is important to look around for a home loan that meets your criteria for a lower interest rate, a better monthly payment, or any other features you desire. You may find this loan with a new lender, or you can always check if your current lender can offer a better deal than what you currently have.
You can compare the interest rate and other terms by going through the pre-approval process with lenders. By doing so, you can find the deal that suits you best.
Calculate the costs of refinancing
Once you have found the loan you want, you should run the costs that changing to a new loan might cause, comparing it to your potential savings. These costs can be from closing your old loan, those that apply to opening or applying for a new one, and even prepayment penalties.
You can calculate the costs of refinancing with our refinance calculator to get a better picture of what you may be saving or spending.
Submit an application
When submitting an application, there are several documents you will need to provide. While your lender will inform you of what documents you will need, they are likely to include:
- Recent pay slips
- Tax returns
- Proof of your residency
- Photo identification
- Bank statements
Close your loan
You may only close your old loan once your new lender has confirmed everything is in order. They will close the loan for you and sign alongside you to make the exchange official. Then, after the lender pays off your old loan, your new account will be opened.
When should you refinance?
You can choose to refinance at any moment, as long as you pass the criteria set out by your lender and have a financial sense of security. The best time for you to refinance, however, depends entirely on you and what you intend to do.
Overall, however, good times to refinance are:
- When you have a good credit score, especially from when you first got your existing loan, you can refinance for a better interest rate.
- When interest rates are on the move.
- If you are interested in switching loan types, especially if you are going from a variable to a fixed interest rate, or vice versa.
- When you are looking for a lower term to pay off your mortgage loans faster.
- When you need to access equity for cash out refinance, or to consolidate debt.
- If you want to remove someone’s name from the loan title.
Ultimately however, when you believe yourself prepared to undergo the refinance process is the best time to start. If you are looking to get started with a trusted mortgage lender, Homestar Finance is an award winning lender with plenty of refinance home loan options for a better home loan. Refinance with us today!
Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.
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