Refinancing your existing home loan can seem like a great way to switch to a cheaper interest rate. However, just because you’ve seen a lower interest rate advertised doesn’t automatically mean you’ll save money by refinancing your home loan.
In fact, if you don’t take the time to compare your options properly, it’s possible you could end up spending far more money than you intended. Of course, if you get it right, a home refinance could also save you potentially tens of thousands of dollars over the life of the loan.
Before you make the decision to refinance your home loan, consider whether it makes sense for your individual financial situation or not.
When a Home Refinance Could Make Sense for You
There are definite situations where it could make sense to consider refinancing your home loan. These include:
– Your current mortgage interest rate isn’t competitive
– Your financial situation has undergone a major change
– You want to access some of the equity in your home to pay for other things (such as a home renovation or a property investment)
– You want to change the type of home loan you have (switching to a fixed/variable rate or different type of loan)
– You want to consolidate personal debts to streamline your finances
If you’re in any of the situations mentioned, it may be possible to find a more competitive interest rate and a more appealing loan type to suit your individual needs.
When a Home Refinance Might Not Make Sense
While seeing a cheap interest rate advertised somewhere can be tempting, there are situations when it might not make sense to refinance your existing mortgage. These include:
– You intend to sell the property in the near future
– Your current mortgage may charge steep penalties for breaking out of the loan term before it expires (such as a fixed rate term)
– Your credit history has some blemishes, which can mean you might not qualify for the really cheap interest rates
– You can’t verify a stable income over a period of time
Things to Consider Before You Refinance
Before you make a decision to refinance your home loan, take the time to calculate the costs associated of moving over to another lender. For example, you may need to pay an application or establishment fee for the new loan. Some lenders charge valuation fees, documentation fees, settlement fees, and other assorted fees.
You may also need to consider any entry or exit fees that may apply to both your current mortgage and the new one you’re thinking about.
Another factor to consider is the loan term. If you’ve already been in your current mortgage for a few years, you’ve already reduced your loan term. By refinancing to a new lender, you could be setting up the new mortgage to start all over again on a new 30 year loan term.
When you’ve done your calculations, you’re in a stronger position to know whether a home refinance will leave you better off financially or not. Speak to one of the experienced financial consultants at EFGA about your individual situation and discuss ways that refinancing your home loan could benefit you.