Picture this. You’ve secured an awesome mortgage deal, thanks to Huspy. You’ve been paying your monthly repayments for a few years now. The market changes and your interest rates go up (boo) or the value of your home increases (yay). It might be time to start weighing up the pros and cons of refinancing your mortgage.
Why? Because refinancing your mortgage at the right time can help you lower your interest rates, pay off your loan faster (saving you thousands), or cash out on your equity. Here’s a quick guide to help you decide if refinancing is right for you.
What does mortgage refinancing mean?
Refinancing a mortgage is when you take out a new mortgage to replace your original one. It’s usually done to reduce interest rates and monthly payments, to cash out a portion of equity, or to change repayment terms.
How does refinancing work?
The process is similar to getting a mortgage. You can shop around and compare the best interest rates on offer, then compare those terms with your current mortgage terms. If you find an offer that is better than the one you currently have you’ll need to qualify and apply for it in the same way you had to for your original mortgage. That means filing an application, getting credit checks, submitting income and employment history, right through to receiving an offer from your new lender.
When should you refinance your mortgage?
There are lots of reasons homeowners choose to refinance their mortgages. Here are just a few of them:
Lower interest rates and monthly payments: if your interest rates have dropped since you first got your mortgage, then you may be able to save money on interest with a lower rate and lower monthly payments.
Pay off the loan faster: for example, refinancing from a 25-year mortgage to a 15-year loan means you’ll be able to pay it off in much less time. You’ll have to pay more each month on your mortgage payments, but the benefit is that you’ll pay less interest in total over the long term. Only consider this option if you can afford to pay more each month.
Claim equity: got significant equity in your home? You may be able to cash out a portion of it by refinancing. This can be referred to as a cash-out, refinance, or equity release. It’s when you replace your existing mortgage with a loan for more than you owe. The difference gets transferred to your account from your lender.
Switch loan type: interest rates tend to fluctuate. So having an variable-rate mortgage carries more risk. Refinancing from an variable-rate mortgage to a fixed-rate loan - where interest rates stay the same - will provide you with more financial stability.
What is the downside of refinancing?
Yes, there are plenty of positives to mortgage refinancing. But what about the downsides? Here are some of the potential pitfalls:
Shortening your mortgage term means you’ll have to pay more on your monthly payments.
On the other hand, lengthening your loan term can result in paying more interest over the life of your mortgage loan.
Cashing out any equity you have will result in a higher loan amount on your new mortgage, which will lead to higher monthly payments.
To refinance or not to refinance?
Refinancing your mortgage is a big decision with multiple factors to consider. Whether you want to lower your monthly payments, change to a fixed-loan mortgage for financial security, or cash out some of your equity to pay for home improvements, refinancing may help you achieve your financial goals.
Need some advice? Our incredible team of mortgage consultants are here to answer your questions. Chat with us today, we’re here to help.