What is refinancing a home in simple terms? This blog post will answer this question and guide you through the basics of home loan refinancing, including what it means, why it might be beneficial for you, and what steps it involves.
By the end of this guide, Freedom Loans hopes that you’ll have a clear understanding of how refinancing works and how it can potentially improve your financial health.
What Is Home Loan Refinancing?
Home loan refinancing means replacing your current home loan with a new one, either with the same lender or a different one. During this process, you take out a new home loan, allowing you to choose a different loan product that offers lower interest rates, fewer fees, or better features.
You might wonder, “Does refinancing mean starting over?” Refinancing does not necessarily mean starting over with a new loan repayment term. Generally, you can choose to either reset your loan term or maintain the remaining term. For example, if you have 10 years left on a 20-year loan, you can refinance to a new loan with a 10-year term. Some borrowers may choose to extend the loan term to lower their monthly repayments; however, this may result in paying more interest over time.
Why Refinance?
Aside from helping ensure that your home loan suits your needs, refinancing can also serve as an effective cash flow management tool. Here are the common reasons you might want to refinance:
- Secure a Lower Interest Rate: Refinancing to a lower interest rate means reduced monthly mortgage repayments. This can free up money for your other financial goals or investments and also result in substantial savings over the life of your loan.
- Improve Loan Terms: If your credit score has improved or your financial situation has changed since you took out your original loan, you can refinance to enjoy better loan terms. This could include lower fees, better customer service, or more favourable repayment conditions.
- Consolidate High-Interest Debts: If you have financial obligations with high interest, such as credit card dues or personal loans, consolidating them into your home loan lets you take advantage of its typically lower interest rates. This simplifies your finances, decreasing the number of monthly payments you need to make. Additionally, it can lower your overall interest expenses, helping you save money in the long run. However, debt consolidation might extend the repayment period in some cases, so consider it carefully before proceeding.
- Access Home Equity for Cash: If your home has increased in value, you might be able to unlock some of that equity through refinancing. This cash can be used for major financial needs, such as debt repayment, home renovations, education, a new car, and investments. However, use this approach with caution, as unlocking home equity might increase your loan amount and, consequently, the interest you have to pay over the life of the loan.
- Change Loan Features: Refinancing allows you to switch to a loan with features that better suit your current needs. You might prefer a fixed-rate loan for stability or a variable-rate loan for potentially lower rates. Other beneficial home loan features could include a redraw facility or an offset account, which can provide greater flexibility and savings.
What Are the Stages of Refinancing?
To successfully refinance your home loan, you’ll need to go through several key stages:
- Assessing Your Financial Situation: Evaluate your current loan, interest rates, and financial goals. Consider the total costs involved in refinancing, including any fees your current lender may charge for switching loans, such as break fees or other closing costs. Review your credit score as well, as it will influence the interest rates and terms you may be offered.
- Researching and Comparing Lenders: Explore various home loan offers from different lenders, paying attention to interest rates and loan features that match your needs. Consider using online comparison tools or consulting a trusted mortgage broker for professional advice and help with finding the best options for your situation.
- Applying for the New Loan: Once you’ve chosen a suitable loan, submit your application along with the required documentation, such as proof of income, existing loan details, and identification. Ensure all information is accurate and complete for efficient processing of your application.
- Approval and Settlement: Upon approval of your application, your lender will pay off your current loan – this process is known as settlement. You will then start making repayments on your new loan according to the agreed terms.
- Finalising the Switch: Your lender will handle the transfer of your mortgage, and you’ll receive confirmation of your new loan details. Make sure to review all the final documents and understand your obligations under the new loan.
Final Thoughts
Home loan refinancing can offer significant benefits when done for the right reasons. However, it’s essential to consider the costs involved and make sure it aligns with your financial goals. By understanding the refinancing process and evaluating your options, you can make an informed decision.
At Freedom Loans, we are committed to helping you find the best refinancing options that suit your financial needs and goals. Contact us today for personalised advice.
1300 364 751