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As a home owner, you are always advised to review your home loan to ensure it remains competitive periodically. Especially with low interest rate mortgage options available in the market, it is tempting to refinance and save your hard-earned money from filling the coffers of your lender. But, is it always a good idea to refinance?

 
woman thinking when refinancing home loan

 

Many experts say that refinancing makes sense if your interest rate is lowered by at least half a percent. Well, indeed, that is a great start. But we beg to differ. We believe that numbers should back every decision to refinance. Yes, before you refinance, calculate your breakeven point to know how long it would be before you ‘really’ start saving money. Besides, the following tips will help you make an educated choice:


Think why you want to refinance
– A lower monthly mortgage repayment is a popular reason to refinance. By adding up the cost of your loan and dividing it by your savings, you can figure out how long it would be before the smaller repayments help fatten up your wallet effectively. However, there are other factors to consider, too.

(Use this home loan repayment calculator to know your mortgage repayments.)

Do you want to refinance to tap into your equity or shorten the term of your loan? Or, do you want to refinance to get rid of the LMI premium?

There can be several reasons to refinance your home loan. We recommend that instead of concentrating on the breakeven point alone, consider your financial goals before definitively deciding whether to refinance or not.


Consider the cost of refinancing
– Meeting your financial goals requires thoughtful planning apart from crunching the numbers, using these handy online calculators. So, before you decide to refinance, apart from the perceived benefits, weigh in the associated costs to make an informed choice.

These costs include the fees charged by the bank to set up the loan, the discharge fee you would pay your existing bank, legal fees, insurance and taxes as well.

Your lender will give you an estimate, detailing the costs of a loan. It is recommended to get in touch with more than one lender to get the best deal. You could start by comparing competitive home loan deals here.


Calculate your breakeven point
– Once you have worked out the costs, you are ready to calculate your breakeven point. Let’s take an example to understand this.

Zach has a 30-year mortgage and wants to lower his repayments, three years into it. He finds a deal that reduces his monthly repayment by $150. The cost of refinancing the loan is $2,500. Thus, it will take Zach about 17 months to recoup the cost of the loan. Moving forward, $150 will be his saving each month.

However, Zach could still be losing money. Do you know how?

Let us tell you. When you refinance, you are effectively turning back the clock on your home loan. So, even if Zach makes a lower repayment for another 30 years, he would end up paying much more in interest over the additional three years. Thus, it is essential to calculate the term of your loan before you refinance.

You can always make additional repayments to pay off your loan faster. Use this extra repayment calculator to figure out your savings.

Refinancing your home loan could offer several benefits, including lower repayments and significant savings. However, several factors affect the success of your decision, including the term of your home loan, the reason why you want to refinance and even the lender you choose to refinance with. Yes, lender fee and after-sales service can make a lot of difference over the life of your loan. At HashChing, we have expert mortgage brokers who will guide you to the right home loan product from the right lender, making it a breeze to finance (or refinance) your home. Get in touch to know more.

 

By Vidhu Bajaj,
HashChing Content Writer

 

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HashChing is helping Australians by providing access to the pre-negotiated home loan deals. Obligation free consultation with one of our partner brokers might save you time, hassle and money.

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