Loan refinancing refers to the process of applying for a new loan to pay off another outstanding loan. Debtors may decide to refinance their loan because they’re struggling to make their current payments. On the other hand, a debtor may want to refinance their loan to get a longer or shorter term, lower interest rates, or more frequent or lower monthly payments.
Why Should You Refinance A Home Loan?
As stated, most homeowners will refinance their home loans to receive better home loan rates in Australia. This can either be done by applying for a loan with a different lender or negotiating your amount with your current lender. It’s easier to speak with your current lender first before jumping ship. However, you may be able to negotiate for better loan rates if you threaten to leave.
Besides common refinancing reasons, like getting a different term length or lower interest rate, refinancing on a home loan specifically gives you access to your equity. If you have a large amount of debt you want to pay off and you already paid $30,000 towards your mortgage, you can refinance to take that money out. Then, you can use it to pay off a high-interest loan.
Why Shouldn’t You Refinance A Home Loan?
Refinancing your home loan could be a significant financial risk for your personal finances. Although you’ll have more cash at your disposal, you may be tempted to use it poorly. When refinancing, you’ll need to state why you decided to remove money from your asset. If you start rolling up in a BMW when you were meant to pay off your loan, you could be in trouble.
Depending on your loan type, refinancing will come with its fair share of fees. Closing costs, such as appraisal fees, origination fees, and title insurance fees, will play a factor in your ability or willingness to finance. These costs may cause you to pay an extra 2-6% on your loan amount. Some banks will even count refinancing as “repayment,” which have their own fees.
How Often Can I Refinance My Home Loan?
There isn’t a legal limit to the number of times you can refinance your loans. However, most lenders will set up a few rules that dictate the frequency of refinancing by loan type.
- Equity Built: To refinance your loan, you need to have equity put towards your mortgage. Every time you refinance, you limit the amount of money you can use. Since lenders only let you take out 80-90% of your total equity, that will shrink each time.
- A Build-up of Fees: At some point, your refinancing fees, like closing costs, will be so high that you’ll negate all earned equity. Prepayment penalties may also be too high for you to pay, so it’s better to limit your refinancing payments until you really need them.
- Lender’s Standard: Bad credit will affect the amount of times you can refinance or whether you can do it at all. Even if you had excellent credit when you initially took out your loan, it wouldn’t matter. You have to maintain your credit score to gain access to refinancing.
- Mortgage Insurance: While mortgage insurance doesn’t directly influence your ability to finance, it may affect how much you want to take out. You can remove mortgage insurance from your loan once you reach 20% equity in your home. If you want to eventually remove mortgage insurance, you’ll have to wait longer before refinancing.
One of the biggest things that should stop you from refinancing frequently is the loan itself. You purchased a loan in the hope that you’ll someday own your property. The more you refinance, the further away you’ll be from achieving your goal. Try to hold off as much as possible.