Your guide to refinancing your mortgage

By Gerv Tacadena
A mortgage refinancing application

For homeowners who have been paying their mortgages for years, there is a likelihood that their financial situations and the market dynamics have already changed. When this happens, mortgage customers often undergo refinancing to better adapt to their current situation.

Is refinancing right for you?

There are many reasons why you should consider refinancing. For one, you might have found a better offer from another financial institution – perhaps one with a better interest rate and relevant features.

Refinancing is also an attractive option if you are planning to use the equity in your home to make other purchases, such as buying a car, investing in your child’s education, or refurbishing your home. It's important to note, though, that the amount depends on the lender's valuation of the equity in your property.

You can also go this route if you are looking to consolidate all your debts. Pooling together your debts into a single credit facility(in this case, your mortgage)could reduce your debt obligations.

So how do you refinance your loan?

Check the costs

Refinancing is not free, especially if you are shifting to another loan provider. Before anything else, you have to check the upfront costs you have to settle before you transition to a new lender. These costs usually include exit and break fees, settlement fees, new loan establishment fees, government charges, loan approval fees, mortgage stamp duty, insurance, solicitors' fees, and valuation fees.

If you're in doubt, don't hesitate to consult a lending specialist, as they can help you assess your current financial situation and determine exactly what you can afford with your budget. Ultimately, the goal of refinancing is to ease your financial burden and to save money in the long-term.

Choose the home loan that works for you

When comparing home loans, it is important to look beyond the interest rate. While a lower rate is usually preferable, there are other things to consider like the home loan's features which could be beneficial in the long run. Some home loans provide mortgage customers with the ability to make advance or flexible payments, as well as access to redraw facilities and/or offset accounts.

As a rule of thumb, you should make sure that your savings will always be greater than the refinancing costs. Otherwise, refinancing will not make sense for your situation.

In order for you to compute for this, you have to list down all the costs associated with refinancing. Then, compute for your interest savings over the term of the loan. You can use mortgage calculators like this one to determine this. You should also compute for the savings you will get from the reduced fees. For instance, if your current loan has ongoing fees, multiply the monthly fee by the number of months in the loan term.

Apply for a new mortgage

Once you determine the best home loan product for you, it's time to apply for a new mortgage. This could be done in a branch of the lender, online, or even through mobiles apps. Less paperwork is needed if you are refinancing within the same financial institution.

If you're looking to change lender, it's a courtesy to inform your current lender of your plans to refinance ahead of time. This can go a long way toward making the transfer smooth and easy.

However, should you apply to a new lender, it will have to check your credit record, income level, and other current liabilities. The new lender might also complete a property valuation to check how much your home is worth.

There are several factors that may hurt your chances of successfully refinancing. For one, many banks and financial institutions set a maximum loan-to-value ratio (LVR) of 90% for refinancing borrowers. Properties with high LVR might ruin your shot of getting refinanced.

You can also ask your new lender about loan features like being able to make interest-only payments, interest-rate reduction. These things are often times negotiable, as well.

Seal the deal

Once the processing is complete, the lender will give their approval in writing, which is called the formal (or unconditional) finance approval. You will also receive the contract for your new home loan.

Before you sign the contract, make sure every specific thing you and your lender agreed upon is stated, including when you will start the payment for your new loan, additional features, and other important inclusions.

A gentle reminder

Refinancing is not as easy when you are not aware of the health status of your finances. Ensuring the security of your income is at the top of the checklist of things you have to do before even considering refinancing.

You also have to consider how far you are already in paying for your current loan. It would not be wise if only after 20 years you decided to refinance your loan with a 25 years term.

Lastly, it is a common mistake to chase a small reduction in your interest rate. Don't get attracted to the low rates some of the home loan products offer without looking at the other costs and savings you might get before making the switch.

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