7 Benefits of Refinancing

Mortgage refinance Australia is not however the option to grab a few thousand dollars to tide over your immediate financial crunch. Conversely, when you refinance home loan Melbourne, you can potentially knock off some months or perhaps even a year from your present mortgage liability.  Mortgage rates generally do not fluctuate in double-digit numbers and in most markets the fluctuation is within just a percentage. But, you should know that even a 0.25% gain in interest charged to your mortgage loan will translate to several hundred dollars across the tenure of the mortgage. 

Nevertheless, when you are refinancing your mortgage, mortgage brokers would be looking at not just the interest rate, but also the way your mortgage is structured. This will include examining your mortgage documents and looking at if you are allowed to make additional payments across the tenure of the mortgage (so that your overall tenure can drop) and similarly whether any penalty is levied for paying off your loan earlier than the pre-determined tenure. Another consideration would be hedging against a potential rise in interest rates in future. 

Let us now turn to some of the specific benefits from a mortgage refinance Australia:

• Lower interest rates translating to smaller monthly repayments

As you have already seen above, even a small drop in the interest rate charged to your home loan can make a significant difference in the overall repayment across the tenure of the loan and your monthly repayment. For instance, if you have a $500,000 mortgage loan repayable over 30 years with an interest rate @ 4.2% p.a. your monthly mortgage repayment will be about $2,445.00. But, if you refinance this loan with an interest rate of say3.59%, your monthly repayment can drop to $2,270.00. Across the life of the loan, this will save you $63,000.00. You can use this savings to pay off your loan early. 

• Maximise available equity

With the loan paid off earlier than originally planned, you have the ability to enhance the available equity on your property and use this for building a new home, renovate the existing home or similar purposes. In some instances, you may also be able to club your higher interest-bearing loans such as credit card outstanding, car loans etc. into debt consolidation home loans. 

• Get your mortgage balance down

When you refinance home loan Melbourne with a lower interest rate, your overall interest burden pegs down and if you have a significant number of years left on the mortgage, this can translate to a significantly lower balance on your mortgage. When the overall outstanding loan amount gets reduced, it will also reduce the number of months your mortgage repayment is due.  For homeowners who are looking to sell their home, this would be another gain since homes with lower mortgage payments add value to the home. 

• Debt consolidation

Using the refinance route, you can consolidate higher interest-bearing loans. But, it is important that this is done right since a wrong debt consolidation can take you further south. Therefore it is essential that you weigh all the pros and cons before you decide to take advantage of the lower mortgage interest for debt consolidation. The primary concern is that you are potentially transferring your unsecured debt such as credit card dues into a secured debt. Once the consolidation is done, if you get into a situation where mortgage payments cannot be paid on time, you can potentially lose your home. Not paying your credit card dues in time will undoubtedly impact your credit score, but it is not as challenging as a foreclosure. Another concern is that once your credit card dues are paid off through refinancing, you may be tempted to spend more and build a new debt and face difficulty repaying the new debt. 

• Extended loan tenure

Refinancing a mortgage loan can help you extend the tenure of the loan. But, even if your new loan carries a lower interest, your net interest burden across the tenure of the loan will peg significantly higher while your monthly instalments get lower. Financially prudent borrowers would be looking at shorter tenure and complete the monthly payment sooner than stretch it into the evening of their lives when earning abilities tend to taper out. 

• Moving from a floating rate to a fixed rate

Some borrowers would have initially opted for a floating rate of interest or ARM and may want to move a fixed rate of interest, particularly at a time when interest rates are the lowest in several years. For homeowners who intend to keep the same home for several years to come this would be a good idea. But, it is desirable to take a careful look at the ARM terms and even seek professional advice before making this move. 

• No-cost refinancing 

Obviously, these are hard times for borrowers and lenders alike. But, if you are offered a ‘no-cost’ refinance loan, the first thing you should understand is that there is nothing like a no-cost loan. There are many ways lenders can load the fees and closing costs while refinancing your loan. But, homeowners may have the option to pay cash for the refinancing costs or merge the costs into the new loan eventually increasing the principal amount of the loan. Alternatively, the lender will charge a marginally higher interest or include closing points. Either way, there are no free lunches!

Summing up

Mortgage refinance can be a wise move for many homeowners. But factors like your credit score at the time of applying for a refinance, the equity available on your home, prepayment penalties on your original mortgage will all weigh in. Therefore, all these factors should be carefully considered before you decide on refinancing your mortgage.