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Refinancing
As
interest rates fall, many borrowers are taking the opportunity
to refinance their home loans and so save on mortgage costs. You
can do this with your existing lender or another offering a more
competitive product.
In
refinancing your current loan, the financial gain from moving
to a cheaper loan should outweigh the costs of refinancing.
Before
refinancing your current loan, you should be sure of your:
- Reasons
for refinancing, and
- Cost
of refinancing.
Reasons for refinancing
You
should be clear about what you hope to achieve by refinancing
as it may involve the time consuming task of shopping for finance
and the nerve-racking ordeal of interviews.
| If
you are happy with their product, consider negotiating
with your current lender. They may be willing
to offer concessions on costs, etc. in order to
retain you as a customer. |
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The
main reasons for refinancing are to:
- Move
house
- Reduce
total interest costs
- Reduce
monthly repayments
- Use
your home equity to borrow more
Move
house
Buying
a new home provides the ideal opportunity to refinance as you
are probably upgrading to a more expensive property and borrowing
to cover the shortfall. If you currently have a fixed loan and
are upgrading your home, it is an ideal opportunity to switch
to a new fixed lower rate or a variable loan.
Reduce
total interest costs
Refinancing
can reduce your total interest repayments.
| Lower rates
- If interest rates have fallen since you obtained your home
loan, you may want to refinance your fixed rate loan to take
advantage of the new low rates. Refinancing would reduce your
total interest bill and perhaps reduce your monthly repayments.
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| Shorter term
loan - You can also reduce your
interest costs by refinancing (even if home loan rates do
not fall) with a shorter term loan although your monthly repayments
may be higher. |
Reduce
monthly repayments
You
can refinance your loan to reduce your monthly repayments.
| Extend the repayment
period - Even if interest rates
don’t fall, you can still reduce your monthly repayments.
For example, if you have already paid off five years on an
existing mortgage, refinancing a new loan on a 30 year period
will reduce your monthly repayments. |
| Switch to a variable
interest rate - If you have a fixed
rate mortgage, you may be able to reduce your monthly interest
payments by switching to a variable interest home loan. |
However,
if the interest rates rise again, your monthly repayments will
also increase.
Use
your home equity to borrow more
For
many people, their home is their biggest asset and source of savings.
The improved value of your property and the amount you have paid
off on your mortgage can be put to work for you to borrow money.
| Home Equity Loan
- You can refinance with a new mortgage that is larger than
your remaining balance or obtain a home equity loan.
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| Pay off other
debt - If you have other debts such
as credit cards and other loans, it may be cheaper to incorporate
these into your mortgage. |
Credit
card interest rates are usually higher than mortgage rates so
you may save money by paying off your cards.
| Don’t
compare loans based on interest rate alone. This
won’t tell you exactly how much you will save
on your total interest repayment compared with
your current loan. You should also compare refinancing
with getting a second mortgage, an equity line
of credit or not refinancing at all. |
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Cost of refinancing
The
time it takes to recoup the costs of refinancing should also be
short enough to make it worthwhile. If you think you will only
be in that house for three to five years and it will take you
five years to cover the costs of refinancing, then it probably
is not advisable to refinance.
The
cost of refinancing can be considerable, particularly if you are
exiting a fixed term loan. You may incur costs for ending your
current loan and costs for starting a new loan such as:
| Break costs -
terminating a fixed loan (perhaps thousands of dollars) |
| Early termination
charges - ending a variable rate loan |
| Mortgage discharge
fee - an administrative cost |
| Mortgage stamp
duty - on your new loan (varies from state to state) |
| Valuation fees
- to establish value of property to be refinanced |
| Lender’s Mortgage
insurance - if you are borrowing more than 80% of the value
of the property |
| Ongoing fee -
monthly cost for having the loan |
| Establishment
or Loan Application fee - cost for applying for a loan |
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