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Refinancing Basics: What Homeowners Should Know - Part II
Friday, 26 July 2024
Welcome back! If you haven’t read Part 1 yet, you can check it out here. In the previous section, we discussed what exactly refinancing is and what some of the benefits can be.
Refinancing is not a decision to be taken lightly, so it's important to approach it with careful consideration. Let's dive deeper into the process and outline the essential steps to take when refinancing and to ensure you are doing what is best for your financial well-being.
Steps to refinancing
• Evaluate your present loan: Review the details of your current mortgage, including interest rates, and break fees if you are in a fixed rate term.
• Explore options: Take the time to compare offers from various lenders. Pay close attention to the interest rates, loan features, fees, and terms that each one offers. Knowing exactly what you need from a new lender will help you evaluate which option works for you. For instance, if flexible repayment terms are what you're after, look for lenders that offer adjustable payment options. Or if your priority is a lower interest rate, focus on finding a lender that offers a more basic loan, which typically have lower rates.
• Determine the costs: Calculate the costs of refinancing, including any exit fees from your current loan, application fees for the new loan, valuation fees, and legal fees. Make sure the benefits outweigh the costs.
• Apply for a new loan: Now, it’s time to submit an application to the new lender. Be prepared to provide documentation such as proof of income, details of your assets and liabilities (debts), and the value of your property. A more detailed list of documents will be provided to you by the new lender.
• Approval and Settlement: If your new loan is approved, your new lender will book a time for settlement which is when they pay off your existing loan and open your new one. After that, you will begin making payments to the new lender based on the new terms.
Additional considerations
• Loan term: Extending the loan term may reduce the monthly repayments but might increase the total interest paid over the life of a loan.
• Interest rates: Verify that the interest rate being quoted to you is not just an introductory offer that will increase significantly after a short period of time or over time.
• Fees: Make sure you understand the fees associated with your new loan. Sometimes a low or discounted interest rate loan has an annual fee associated with it. Make sure that even with such a fee you are happy with the deal.
• Cash back offers: Sometimes, as an incentive to attract customers, lenders might offer hundreds or thousands of dollars in ‘cash back’ offers. Depending on the lender these can be good deals or not-so-good deals. Be certain you understand what you’re getting as the benefit of a few thousand dollars given to you to sign up might become less appealing once you factor in fees, charges, and the new interest rate. That said, an offer like this could be just what you need if your goal is to access equity in your property.
• Be accountable: Consider how refinancing fits into your overall financial goals and whether it aligns with your long-term plans. Do your homework, consult with professionals if needed, and choose the path that best fits your financial journey.
How to find another lender
If you are unsure about what is involved with refinancing, or are worried that it’s too difficult, talking to a Mortgage Broker or contacting another lender directly can help. The process may be online, over the phone, in a branch or via a mobile lender/broker.
A quick summary
To summarise, refinancing can be good for your financial planning. Take the time to research offers, calculate fees and charges, and ensure that the options you look at align with your long-term objectives. Whether you're lowering your monthly payments, saving money on interest, or achieving other financial goals, it's all about finding what works for you and your situation.
HomeStart recommends that you seek your own independent financial and/or legal advice prior to making decisions about your financial needs.