Refinancing – The Perfect Solution To Save Thousands Of Dollars
- July 30, 2019
- Posted by: admin
- Category: Uncategorized
Refinancing – What Is It?
The term “refinancing“ refers to the method of replacement of an existing debt obligation or loan, with another debt obligation that has terms varying from the original. For example, if you have an existing home loan, it can be completely paid off and replaced with a newer loan under a different set of T&Cs. Refinancing is a great practice for saving on debt payments, especially when the interest rate environment of your current loan agreement has changed significantly.
A refinance involves the revision of the interest rate, payment schedule and terms of an individual’s or business’ previous credit agreement. Note that this is different from a second mortgage, where you actually draw on the equity you have built up in your home.
Let’s explore how refinancing can help you save thousands of dollars.
Refinancing – How Can It Help You Save?
Consider an example: Say you have to pay interest at 5.37% rate on a principle home loan of $600,000 over a 25-year term. That amounts to a monthly interest payment of a total $3,648. But if you swapped to a mortgage at a lesser interest rate at 5.24%, you’d just be paying $3,602 a month. Over a period of 25 years, that saving amount would add up to a great $13,800 in total savings.
When refinancing, another lucrative savings option you can consider is to switch to a loan with a lower interest rate, while continuing on to pay the same monthly amount as you were already doing on the previous, higher interest rate. This strategy will not only see you pay less total interest, but also help pay off your mortgage much faster.
An alternate option would be to refinance by consolidating high-interest credit card debt or debt from a personal loan into a singular, unified home loan with a lower overall rate of interest. This is a good approach to help you save money as well.
Refinancing – What Features To Keep In Mind?
When making a refinancing decision, it is important to figure out what features appeal to your personal requirement before deciding on a lower rate of interest. Mortgages offer a wide range of features and benefits, so take your time in browsing and choosing the best fit option.
These are the questions you must ask while choosing the ideal refinancing option:-
1. Does it offer a variable rate or a fixed rate?
A variable rate gives you flexibility while a fixed rate offers certainty. Variable rates fluctuate with the market, so you have the opportunity to save more when it is down. However, there is always inherent risk involved that you might actually end up paying more as the market can rise sharply without precedence (The January 1990 inflation for instance, when the home loan interest rate in Australia reached an all-time high at 17.5%). With a fixed rate, on the other hand, there might be no real quick payments options or an early exit strategy.
2. Does it offer an offset option?
An offset account helps you pay less interest on your home loan. This occurs as your account balance is “offset” against your home loan balance, which means you’re only charged interest on the difference remaining after subtracting offset amount from total loan balance, instead of the entire balance. You pay less interest which helps you save thousands of dollars in the long run.
3. Does it offer a line of credit?
If your house entitles a lot of equity, a business, bank or individual might be willing to lend you a relatively inexpensive line of credit secured against your property. A line of credit gives you instant access to funds that you can borrow from at any time, keeping in mind that you do not exceed the maximum amount (ie credit limit) agreed upon, or fail to meet any other stipulated requirements like making timely minimum payments.
4. Does it offer repayment flexibility?
Flexible repayments are a great way of ensuring timely payments that are perfectly suited for your current budgeting plans. It reduces your monthly instalment burden and minimises chances of default. You can either opt for an accelerated repayment that allows you to save more on interest and clear your loan faster as you earn/save more on good months, a step-up step-down repayment tailor-made for early-stage earners that allows you to gradually increase instalments as you earn more, or even a balloon payment scheme that allows you to pay small amounts at the start with a balloon payment of about 30 to 40% altogether in the last instalments.
5. Does it offer early payouts?
Having an early payout option is a great way to maximise your savings on interest payments, and to clear your loan faster. Carefully calculate your costs and ensure that the early payout option doesn’t have a considerable minimum penalty.
Refinancing – What Are Your Costs?
Be very mindful of and thorough with the overall costs associated with your refinancing decision. For example, let’s say you take out the loan before 30 June 2020, your lender might charge you an exit fee for having terminated the loan ahead of schedule, especially if it is a fixed-rate mortgage.
Your costs of getting a new mortgage will have a neutralising effect if you have to pay an establishment fee that makes the overall costs greater than what you are currently playing. Be sure to check whether your loan has a high redraw clause, which means you’ll be charged extensively each time you take money out of your account.
Take out the time to do the maths.
Feel free to use an online mortgage calculator to compare and contrast refinancing options to get maximum benefit for the best interest rates. Take note of any hidden fees and charges that may offset any savings you take home after switching your loan plan. We recommend The Australian Security & Investment Commission’s (ASIC) MoneySmart Calculator to easily make mortgage switching calculations and assess overall costs.
Refinancing – Get Professional Help
With many variables and factors to consider, refinancing can appear daunting, especially if you are very new to the budgeting realm. Getting professional help then is certainly a good option. A good broker has expertise in the market and can help you understand your own needs much better. Their experience and access to contacts mean that you don’t have to fly solo, and can provide you with valuable information from a variety of lenders, help assess total costs with complete transparency, and understand all the benefits you can get from each associated loan.
Apart from doing the legwork, they make your refinancing process a smooth ride. Their knowledge and understanding of mortgages can help you achieve the best outcome if you decide to go ahead.