Debbie Shankar - 27 Oct, 2016

What are the Risks and Benefits of Refinancing Your Mortgage?

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If you have been wondering if refinancing your home loan is a good idea, you have a right to wonder. With so many Australian’s getting cheaper refinance rates, now is the time to consider your options. It is true that there are risks and rewards  of refinancing. Not everyone will come out on top if they get a new loan. However, many people can benefit if they take the time to explore their options, and understand what is involved with replacing their original mortgage. Here is a look at both some of the rewards  and risks.

The Benefits of Refinancing

Get a Better Interest Rate. One of the reasons you are making large payments now is because of your present interest rate. Get a lower rate and you will also pay less interest, which means less debt.

A Lower Payment. Perhaps the greatest benefit  of refinancing is that many homeowners will be able reduce their monthly mortgage repayments. This depends on the mortgage terms, but it could also reduce the amount of overall interest to be paid over the remaining life of the mortgage.

Security of a Fixed Rate Loan. Another one of the very good reasons to refinance is that it can give you a predictable mortgage payment each month. With an adjustable rate mortgage, you really are at the mercy of the economy. You can break that trend and enjoy the better benefits with a fixed rate loan, letting you sleep more soundly at night.

Pay Off the Mortgage Sooner. When getting a new loan to replace your current one, another one of the benefit  of refinancing is that you could shorten your  mortgage term. This means that instead of paying for another 30 years, you could reduce it to a 15-year mortgage if you could handle the payments. Your payments will become larger but you would have to pay less overall.

The Risks of Refinancing

More Fees. If you are not careful, instead of receiving some of the rewards  of refinancing, it is possible that you may regret doing it. This is very likely to occur if you do not have a good credit score, or if you do not investigate the terms of the mortgage carefully beforehand. Both are absolutely essential to getting the mortgage you really want.

Lenders Mortgage Insurance. These very unpleasant words can ruin your day if you were not expecting it. Having to pay Lenders Mortgage Insurance (LMI) is the exact opposite of the financial relief you expected and hoped for when you applied for the new loan. Even if you had enough equity in your home recently, a drop in your home’s value can just about take it away. Find out the value of your home before applying to be sure you will be able to avoid adding the expense of LMI.

Exit Fees. Closing out your old loan may have some surprises. Some loans apply extra fees if you close the mortgage early. It can be a stated amount, or it could be a percentage of the mortgage. At any rate, it might be surprisingly higher than you thought.

More Features Could Cost You More. When you refinance, be sure to check that you do not end up paying even more for additional  benefits to your mortgage. This could raise your payments even more, making it even harder to make your monthly payments.

When applying for a new mortgage, in order to get the benefit of refinancing, be sure to ask yourself some important questions  and consider  exactly what you have with what you are being promised. Think about  the total long-term costs, and your own situation and needs before you search and compare  rates. In that way, you can be sure to benefit.

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