The process of refinancing a loan is the application for a new one to pay back an existing loan. Some debtors refinance because they are struggling to pay their current loans. A debtor might refinance a loan in order to obtain a shorter or longer term, a lower interest rate, or a more frequent or smaller monthly payment.
Why should you refinance your home loan?
Most homeowners in Australia refinance to get better home loan interest rates. You can do this by either applying for a new loan or negotiating with your current lender. Before you jump ship, it’s best to talk with your current lender. If you threaten to leave, you may be able to negotiate a better rate.
Refinancing a home loan is not only for common reasons like a lower rate or a longer term, but it also gives you the opportunity to access your equity. You can refinance if you are in a lot of debt and have paid off $30,000 on your mortgage. You can then use the money to pay back a high-interest debt.
Why should you not refinance your home loan?
The refinancing of your home loan can be a major financial risk to your finances. You may be tempted, even though you have more money at your disposal, to spend it poorly. You’ll have to explain why you removed cash from the asset when refinancing. You could get into trouble if you decide to drive a BMW instead of paying off your loan.
Refinancing can come with a fair amount of fees, depending on the type of loan you have. Closing fees such as appraisals, origination, and title insurance costs will affect your willingness or ability to finance. You may have to pay up to 6% more on your loan because of these costs. Some banks even consider refinancing to be “repayment,” with its fees.
How often can I refinance my home loan?
You can refinance loans as many times as you want. Most lenders have a set of rules that determine the frequency at which you can refinance your loans.
- Equity Built In order to refinance a mortgage, you must have equity in your home. Each time you refinance, you limit the amount you can borrow. You can only take 80-90% equity out of your home, so that amount will decrease each time you refinance.
- Fees that build up: Your refinancing costs, such as closing costs, may eventually be so high you will lose all equity. You may have to pay high prepayment penalties, so you should limit your refinancing until you need it.
- Standard of the Lender: A bad credit score will limit how many times you can refinance, or if you can at all. It doesn’t matter if you were a good credit risk when you took out the loan. To be able to refinance, you must maintain a good credit rating.
- Mortgage insurance: Although mortgage insurance does not directly affect your ability to finance it, it can influence how much you take out. Once you have 20% equity in your house, you can remove the insurance. You’ll need to refinance more often if you want to remove it in the future.
The loan itself is one of the most important things that stop you from refinancing often. You bought a loan with the idea that you would own your property one day. You’ll get further from your goal the more you refinance. Hold off on refinancing as long as you can.