Laura Akhurst - 5 Jul, 2017

Should I Refinance My Mortgage?

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In a time when there’s talk of rates rising, many people ask if they should refinance. Refinancing at the right time can save you thousands over time. But, by not reviewing your personal and financial circumstances before switching can be costly. Therefore, it’s important to consider all factors.

Top five reasons to make the switch and refinance.

1. Securing a Better Interest Rate

One of the main reasons to switch home loans is to secure a lower interest rate and reduce monthly repayments. Although it’s vital to weigh up the costs and to then compare these to any savings you’ll make, before jumping ship.

The costs to refinance typically include application fees, ongoing bank charges, property valuations and exit and break costs. While most refinancing charges are under $1,000, exit fees and break costs can be expensive. Hence, let’s look at these in greater detail.

Exit fees – If you’re looking at paying out your home loan after less than five years, then you may have to pay an exit fee. This fee could be a percentage of the remaining loan balance, or it may be a fixed rate. Exit fees are not applicable for mortgages taken out after July 1, 2011. But, loans secured before this date can incur a fee.

Typically, exit fees include break costs for a fixed-term loan. Calculation of these costs depends on your rate, the current market rate, your loan amount, and your remaining term. Usually, if you borrowed at a higher rate than the market rate, you’ll incur a break fee. However, if the market rate is higher than your fixed rate, then usually no fee will apply.

2. Switching Interest Rate Types

With rates expected to rise, homeowners want greater certainty; this means they look to lock in a lower rate. Rate switching can mean going from a variable home loan to a fixed or vice-versa when rates are falling. Of course, before making any move consider costs and any long-term gains. Otherwise, you may find that you’ve paid more than needed.

3. Accessing Home Equity

Having a mortgage for 10-years or more, usually, means your property is worth more than when you bought it. Plus, you would have paid a considerable amount off the loan. Therefore, refinancing allows you to access this accumulated wealth to build added assets or to fund other projects.

Accessing your home equity can give you greater financial freedom. For instance, let’s say you bought a home for $380,000, 15-years ago, and you now owe $80,000 on the property. Over that 15-years, your home has more than doubled in value, so it’s now worth $680,000. Subsequently, this price increase means that you have $600,000 in equity. By refinancing you can use some of this value to buy other assets such as an investment property.

4. Debt Consolidation

Refinancing many loans and credit card debt enables you to roll this into one loan and reduce repayments. Although, it’s important to remember that if you’re consolidating debt that you’re also increasing your home loan principal. As a result, you should aim to pay more off your home loan than the monthly minimum. Consequently, you’ll reduce your interest.

5. Gaining Access to More Home Loan Features

Those with a ‘no frills’ home loan, can refinance to add other loan features such as an offset account. These features can help to pay off your home loan faster and allow you to manage your money better.

Before refinancing, always talk to your existing lender. Firstly, they may access equity or switch your home loan rate without you needing to take out a new loan. Additionally, if refinancing is your only choice, then they may give you a far better deal than a new lender.

Do you want to know more about comparing home loan deals before switching? Then discuss your options with an eChoice broker. Our brokers help you compare the market to find the most competitive mortgage.

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