Mike Mackenzie; Perth Mortgage Broker, talking diligently to a client about his loan options

A swift guide to refinancing your home loan

What is refinancing? To put it simply…

Refinancing is the process of taking out a new mortgage to repay an existing loan. You may decide to refinance if there has been a change in your personal or financial situation, or simply because you want a better deal on your home loan.

Refinancing isn’t very different from what was involved when you first got your mortgage, however refinancing may help you take advantage of lower interest rates and save you money. To find out if refinancing is the right move for you, it is recommended you getting in touch with a broker to discuss your options.

How does refinancing work?

When looking to refinance a loan, you should first examine the specifications of your current agreement to know how much you’re paying. Its important to check if there is a prepayment penalty on your current loan, as the value of refinancing could potentially be outweighed by the early termination cost. Then, check if you qualify for a new loan.

The next step is to compare home loans to establish if you can find a better deal than your existing mortgage loan. Once you’ve settled on an offer that you’re happy with, you can start the process of completing a mortgage application and locking in your interest rate to close the loan.

Why would you refinance a home loan?

There can be some fantastic benefits in refinancing your home loan, just make sure you also weigh up the expenses involved in the transfer to ensure it’s the right choice for you.

Some common reasons for refinancing are:

  • Switching between variable and fixed rates
  • Lowering your monthly payment
  • Cashing out on some equity
  • Lowering your interest rate
  • Paying off your other debts
  • Shortening your loan term
  • Wanting to invest
  • Renovating

The importance of knowing how much useable equity you have

Equity vs Usable Equity

Equity is simply the difference between how much money you owe the bank and how much your house is worth. For example: if your home loan is currently worth 200k and the value of your home is 500k then the equity is 300k.

Usable equity is calculated slightly differently. It is calculated using 80% of your home’s value minus the mortgage. For example: a 500k home becomes 400k (80%) and then taking away the 200k home loan results in 200k of usable equity.

 The reason usable equity is calculated differently is that most banks require a 20% deposit, otherwise they charge you lenders mortgage insurance which is a one- off fee added to home loans.

How you can use your usable equity

Equity can be used to consolidate debts like high interest credit cards, or pay for large expenses such as home improvements, education or purchasing a vehicle. But you need to keep in mind that how much equity you have will affect the amount of money you can borrow.

Get in touch with Mike for a free evaluation to find out how much equity you have.

Split home loans

Currently 1- and 2-year fixed rates for home loans are lower than most variable interest rates! This means that it just makes sense to fix a large portion of your loan to lower the amount of interest you have to pay.

However, most fixed rate loans don’t allow you to make extra payments towards the loan. This is where a split loan is beneficial. A split loan allows you to separate a portion of you loan onto a variable rate, allowing you to aggressively pay down that portion of the mortgage while locking in most of your loan on the lower interest rate.

This method is highly recommended as it will allow you to pay off a bigger chuck of your mortgage which intern will lessen the interest you pay, shorten the loan term, and build in a buffer encase life changes occur.

Why you should be aggressively paying down your mortgage as fast as you can

Over the last four years interest rates have moved to record lows, so banks and brokers have locked people into new lower rates. But did you know that interest rates are back on the rise?

When the fix rate ends your new variable rate could be higher than the fixed rate which will intern increase your minimum monthly repayments.

Paying down your mortgage aggressively using the split loan method puts you in a better financial position when interest rates rise. Split loans will be your saviour from unwanted high interest and can help keep your minimum monthly payments the same or lower once your fixed rate ends.

Considering refinancing? Contact Mike

Types of refinancing options to consider

Traditional rate and-term refinances

Traditional rate and-term refinances occur when the original loan is paid and replaced with a new loan agreement that requires lower interest payments. This changes either the interest rate of the loan, the term of the loan, or both, saving you money, and/or reducing your monthly payment. The amount you owe generally won’t change unless you roll some closing costs into the new loan.

Cash-out refinances

Cash-out refinances let you take some of the equity in your home and turn it into cash you can spend. This increases your mortgage debt but gives you money that you can invest or use to fund projects such as home improvements. You can also secure a new term and interest rate during a cash-out refinance.

Debt-consolidation refinances

Debt-consolidation refinances are similar to cash-out refinances, except you use the cash from the equity you’ve built to repay other non-mortgage debts, such as credit card debt. Your mortgage debt will increase, but because mortgage rates are usually lower than other loan rates, this can save you money in the long run.

Streamline refinances

Streamline refinances accelerates the process for borrowers by eliminating some of the requirements of a typical refinance, such as a credit check or appraisal.

Do you want to pay off your mortgage in half the time?

Who wouldn’t want to pay off their mortgage in half the time?!

If you want to supercharge your mortgage and pay it off in half the time, check out my guide which reveals my three top tips to paying your mortgage faster and be one step closer to having financial freedom sooner than you thought!

Download my guide to uncover my 3 top tips, alongside some things you may have never been told before!