Homeowners with an existing mortgage may find that refinancing is an attractive option in today’s low rate environment. Older loans often have non-competitive interest rates and lack the flexibility and features available in the current market.
Is Now The Right Time To Refinance Your Mortgage?
Regardless of the age of your loan, it is always helpful to periodically review its terms to determine if it still fits your current situation and meets your financial goals. Refinancing is a process that involves paying out your current loan and replacing it with one that has a lower monthly payment and/or a shorter term.
When to Consider Refinancing
Before taking any action, it is important to establish the underlying purpose of refinancing your mortgage. Lenders offer a variety of different loan packages designed for those seeking lower rates, shorter terms, debt consolidation or equity extraction. Focusing solely on the interest rate may be a mistake. Borrowers are advised to consider every aspect of the loan including the costs associated with changing lenders.
Refinancing your mortgage can make sense in the following situations:
* Your current loan interest rate is no longer competitive
* You would like to recover some of the equity in your home for remodeling, renovations or personal needs
* You want to consolidate several outstanding debts such as personal loans, car loans or credit cards
* There is a significant change in your financial circumstances
* You are interested in additional loan features including redraw facilities, account splitting and flexible repayments
* You want to change to a fixed rate loan
* You want to change the term of your mortgage
Conversely, it is also important to recognize when refinancing your mortgage may not be a beneficial option.
* Your existing mortgage is subject to prepayment penalties
* Refinancing costs are excessive
* You plan on selling the property in the near future
* Your income is unstable or may be declining
* Your loan balance is low and close to being repaid
Borrowers should also be aware of additional fees associated with refinancing, including application, settlement, loan establishment, loan service, entry, exit, legal and stamp duty fees. If the loan exceeds 80 percent of the property’s value, the borrower should determine if mortgage insurance or a low deposit premium is required.
It is very difficult to know exactly when interest rates will begin to rise, so it always makes sense to calculate the payback period for a new loan. This can be accomplished by dividing the total closing fees by the expected monthly savings. If the payback period is relatively short, it may be time to refinance your mortgage. However, it is important to recognize that extending the loan term can substantially increase the total cost of owning your home even if the monthly payment is reduced.
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