Refinancing Your Home Loan: Key Issues to Consider

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Historically, refinancing your mortgage is a good idea if you cut your interest rate by 2-percent or more. But getting a lower rate is not the only reason people consider refinancing.

For others, it’s because their lender has increased the interest rate more than what the Australia Reserve Bank (ARB) has set.

Still, each case of refinancing is unique, but there several common issues that everyone should take into account before the process. Here is what you should know.

Is It Worth Refinancing a Home Loan?

The short answer is YES and NO – based on a string of factors. 

Refinancing depends on your individual situation. Whether it’s a good idea or not depends on how it will impact you. Before deciding to refinance, you should compare your current rate and other available rates.

Knowing how much you’ll pay by the end of different loan options will help you determine if it’s worth refinancing. Of course, you might also want to look at the features that each mortgage option offers, such as offset account and redraw facility.

Experts also recommend talking to your current lender to see if they’re willing to reduce your rate or give you favorable terms.

What Happens When You Refinance a House?

When you refinance your home loan, you apply for a new loan and use the amount to pay off the original loan. Often, your new lender will move the funds to the old lender without you touching it.

Refinancing your house allows you to qualify for favorable terms and better rates to make repayments more manageable and flexible. When done right, refinancing can help to reduce your monthly repayments.

When Can You Refinance Your Home Loan?

There are several instances when refinancing really makes sense, and it’s undoubtedly the best decision.

If you can get a cheaper loan that can save you some serious money, then go for it. A more affordable loan can mean fewer fees, lower interest rates, or both. A loan offer that can save you thousands of dollars by the end of the agreed term is undoubtedly a great option.

Refinancing is also a great decision if you have found a loan that can help you repay your mortgage faster. Let’s say you got a 3.95 rate when you had a rate of 5%. If you continue paying the same repayment amount for the new loan, you’re likely to complete paying off your home loan faster.

It’s possible to unlock the equity in your home if you refinance your home loan. Over time, your home increases value, and if you refinance, your new lender will consider the current value of your home. Unlocking your equity can help you get another loan to invest in any assets you want.

How Much Does It Cost to Refinance a Mortgage 

The cost of refinancing is one of the critical considerations in the process. Most people usually recoup the cost within months, but it’s important to know what you’re likely to pay upfront.

The common costs include:

  • Discharge fee: Your older lender will charge about $100 to $400 to process your paperwork for discharge
  • Break fee: This fee is for fixed loans, and it varied depending on how variable rates have reduced
  • Set up fees: Your new lender can charge anything from $300 to $1,000
  • Lender’s title insurance: $500 to $3,000
  • Lender’s mortgage insurance: Depending on your situation, you might buy LMI or not

You can negotiate the fees, and lenders are willing to reduce your setup fees to earn your business. Shopping around and identifying lenders that have the best deals will give you some leverage in fee negotiation.

How Long Does It Take to Refinance a Home Loan Australia? 

The time the refinancing process takes depends on how fast you can get the documents from your old lender and the time the new lender takes to process them.

In most cases, it can take about three weeks to six weeks. You have to research and understand your options to pick the best deal. This can take several days, depending on what you’re looking for.

Once you find the right option, you need to submit your application; this should take a few hours if you’ve all the necessary paperwork. Lenders can get back to you within three business days with your loan estimate and disclosures.

If you been living in that property for quite some time, say five years, you may need a home appraisal. Then, the next step is underwriting, which takes the most time in the process; about eight business days.

When Shouldn’t You Refinance?

As noted before, refinancing might not be the right decision all the time.

If you’re on a fixed rate, be sure to think things through before refinancing. Fixed rates can last between one to five years. During this period, variable rates are likely to increase, meaning you’re shielded from the increases. So, refinancing might not be an option at this point.

Fixed rates also come with early termination fees and discharge fees. You should look at both fees and determine whether refinancing is worth considering.

If the setup costs of the new loan outweigh the savings, you should be careful. You also check the fees, including application, valuation, stamp duty, and settlement. If the total is pretty high, it might not be a wise idea to refinance.

Also, if the new loan doesn’t offer the features you want, you need to think twice about refinancing. Some loans may offer low rates and fees but come with minimal features.

Final Thoughts

If you’re thinking of refinancing your home loan, this post should guide you in making the right decisions.

Before searching for other loan options, you can ask your current lender for better terms and rates. If they’re unwilling to offer them, you can then compare the different options in the market and pick the most favorable deal.

The ideal options not only have better rates and fees, but also offer the kind of features you want, such as redraw facilities, offset accounts, and split rates.

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