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Secrets to Successful Refinancing
Posted October 25th, 2010
and last modified January 19th, 2012
If you are paying off a home loan then you may find that sometimes you are able to find loans that will have better rates then your loan. If you are able to find a home loan with better rates then you may be able to save money by switching to the loans. If you switch home loan you will be refinancing. Refinancing is a great way to save money on your home loans but it does not come without its risks. The risks of refinancing should be well known before you settle for another loan and you should be sure that you are saving money when you refinance. There are many secrets to successful refinancing that will help you ensure that you are getting the best deal that is available at the time and in the future.
Refinancing Options
What you should First Think About
Before the whole process starts you may notice that there are better loans available at the present time. However, before you refinance you should know what you will be looking for in the new loan. Before you refinance you should consider:
- What you will be looking for with the new loan. If you are considering refinancing you should be considering what you are looking for in the new loan. Simply finding a loan that has the lowest interest rate is not enough to make you refinance you need more. When you refinance you will have to pay a lot of fees to change lenders and more fees to apply for a new loan. When considering refinancing realise that these costs can be a lot and will often outweigh the benefits of refinancing.
- Security. If you are looking to refinance to another home loan then you should consider how secure your income is. The global financial situation has shown that it can be very fragile and many people will lose their jobs when the economy is shaky. If you are looking to refinance you should be sure that your income is secure. By making sure your income is secure you will be sure that you will be able to continue to pay off the loan for a long time.
- Term of the loan. If you are looking to refinance a loan then you will want to consider the term of the loan that you are changing to. While a loan might seem like it has low repayments you should make sure that the new loan is simply not another loan that has a longer terms, and therefore lower repayments. You should make sure that you are not locking yourself into another long term financial commitment.
- Talk to your existing lender. If you are considering refinancing your loan then one of the first things that you should do is talk to your lender. First, by talking to your lender you will be able to get an idea about how much changing loans will cost you. Secondly, by talking to your lender they may offer you a better deal on your loan so they keep you and your business. When you have a loan you should realise that you are making the bank a lot of money over the course of the loan and they will want to keep you at all costs. If you are looking to talk to your lender then you should be sure to paint the best picture of yourself to them. Make sure that all your credit cards are paid off and that all your other debts are well managed.
When Refinancing makes Sense
Now that you know what you should be looking for before you refinance you should then understand when refinancing makes sense. There are many times when people will be looking to refinance but you must know when the right times are. Refinancing will make sense when:
- When should you look at refinancing. When you are paying off a loan you may be very happy with your home loan. You will be making all your repayments as required and will have money left over for other things. However, while you may be happy with your current situation you should always be looking for a loan that will save you more money. By saving more on your loan you may be able to make additional repayments onto the loan. By making additional repayments onto your loan you will be able to reduce the amount that you owe faster and pay less interest over time. If you have a home loan you should look at the possibility of refinancing every three years just to be on the safe side.
- Lower interest rates and repayments. One of the main reason people will be looking to refinance is that they have found a home loan that has a lower interest rate or lower repayments. Sometimes some providers will increase their interest rates more than others and more than what is set by the reserve bank. This will frustrate people and they will notice that other lenders have not increased their interest rates. Even a slight increase in the interest rate that is offered with your loan can really affect the amount that you pay onto a loan. By refinancing to a lender that does not increase their interest rates as often as your lender you can potentially save a lot of money.
- Flexibility. All the loans that are offered will be different in some way. While some loans will look similar they will generally be different. However, different type of loans will generally offer the same features with them. If you are paying off a loan then you may notice that there are other loans that are available that offer a bit more flexibility. Some basic variable rate loans and fixed rate loans offer little flexibility and while this may have suited you at the start of you loan, your circumstances may have changed and you may find that you could actually use a little flexibility. If you find that you loan is too restrictive then refinancing to a flexible loan is a valid option. For example, if you have a basic variable loan you may have a very low interest rate and few fees to pay but you may not be able to make additional repayments. If you make additional repayments onto your loan then you will not only pay off your loan faster but you will also save a lot of money on interest that will not be charged to your account. Therefore, if you find that your loan is too restrictive then you can potentially save a lot of money refinancing to a loan that is less restrictive.
- Fixing the interest rate. Another time that people will look to refinance their loans is when they are looking to fix the interest rate on the loan. Interest rates follow cycles and generally the interest rates will rise for a while then fall for a while. Many people will fix the interest rate on their loan when they believe that the interest rates have bottomed out. If the interest rates have bottomed out they will generally rise soon and perhaps even rise a lot over the fixed rate period. If you are able to lock in a low interest rate then after a while you may find that the interest rate you are paying is lower than people who are on variable rates. This will allow you to save money on your repayments.
- Consolidate debts. Another popular reason people will refinance a home loan is when they want to consolidate their debts. Most people will have more than one form of credit. Some people will have personal loans and credit cards debts that will have very high interest rates and high repayments. Some credit cards have an interest rate of over 20% whereas the home loans will generally have an interest rate of below 8%. By refinancing you will pay off these high interest debts and change them to the low interest debts, thereby reducing the amount that you have to pay each week. While some of these forms of debts are necessary reducing the amount that you have to pay on a weekly basis will free up money. Many people will be able to put these forms of debt onto their home loans and reduce the amount of money that they will have to pay through paying it off over a long period of time.
- Release equity. Another reason why people may look to refinance their loans is that they will be looking to free up some money to invest in other ventures. One way people can do this is buying refinancing their home loans and releasing money through a home equity loan. Many people will use the home equity loans to improve their property portfolio and increase their worth. However, if you are looking to do this then you should realise that you will be increasing the amount of time that you will be in debt for and the amount of interest that you will have to pay. If you are looking to refinance to release your equity then you should make sure that you are doing the right thing and buying a property that will make you enough money.
When shouldn’t you Refinance
Many of the reasons people will refinance their loans have been listed above and most people will find that during their loans they will be faced with one of the situations at least once. However, there are sometimes when refinancing will not be the best option for you and it will actually cost you more money to do so. The times when you shouldn’t refinance are:
- Avoided if possible. As mentioned before refinancing may not always be the best options and should be avoided if possible. While there may be some loans that are available that will save you money in the long run you may find that it will cost more for you to refinance then staying with your current loan. Furthermore, you may have built up a good relationship with your current lender and refinancing may be a cheaper option but you will lose the relationship that you have built up over time. The main thing to remember if you are looking to refinance is that if you am able to avoid refinancing your home loan then you should avoid it. Refinancing will cost you a lot of money and can be very risky if the financial conditions change.
- Small savings. If you are looking to refinance to another loan for a small reduction in the interest rates then you should think twice about refinancing. Small saving in the interest rates will be able to save you money, however the interest rates can change over time. Furthermore, if you change onto the new loan to save money the saving can disappear as soon as they appeared. Furthermore, if you go to another lender for a small reduction in the interest rates then you may find that you are saving money but some other service is removed. Many of the lenders that offer a lower interest rate may have worse service when it comes to handling your loan. So, while you are saving money you will find that the service that you receive will be worse. Generally if you only stand to save a small amount on your loan then you should be looking to stay with your current provider.
- Not long left on the loan. A home loan can have a very long term. Some home loans will allow you to pay off the loan over 10 years while other home loans will allow you to pay the loan off over 25 years. If you have been paying off your home loan for a long period of time then you may find that you do not have long to pay off the loan. If you do not have long until the loan is paid off then you may find that you should just avoid refinancing. When you refinance a loan you will find that you will have to pay many fees. The fees that you have to pay when refinancing can be quite a lot. Often the amount of money that you have to pay on these fees will be offset by the savings that you will receive. However, if you do not have long till the loan is paid off then you may find that you will not be able to save much money from refinancing at all. Furthermore, if you are refinancing a loan and increasing the loan term you may not actually be saving any money at all. Remember if you are paying off the loan over a longer period of time then you will actually pay more in interest over the course of the loan.
- High exit fees. The exit fees of many loans can be very high especially if you are leaving the loan very early. Before you commit to refinancing you should look at what the exit fees of your current loan are. If the exit fees of your current home loan are very high then you may find that you should not refinance. If you are considering refinance then you should spend some time doing all the calculations to find out how much you will have to spend. When you are looking to refinance you should find out how much you will have to spend to refinance. Calculate all the cost and compare then with the savings that you plan to make. If you plan on refinancing and you find that the cost of refinancing outweighs the benefits then you should be sure that you do not refinance.
- Consider the tax implications. When you are paying off a home loan there is a lot of details that are tied into your loan. One thing that many people will be managing with their home loans will be their tax. If you have an investment property then you will have many taxation issues that come with your home loan. For example, the interest that is charged on your home loan will be tax deductible if the property is negatively geared. While many people will be looking to refinance to save on the interest that is charged to the loan this may not matter to people who have the income to deduct the interest that accumulates on the account. If you are looking to refinance then you should talk to your accountant and be sure that you understand all the issues that will come with refinancing.
The Cost of Refinancing
The fees that are associated with refinancing have been mentioned a lot. There will be many fees that will have to be paid when you are looking to refinance and you should be sure that you know about all of them so you can take them into consideration when you are looking to refinance. The fees that you may have to pay when you are looking to refinance are:
- Exit fees. When you exit a loan you will have to pay exit fees. The exit fees will be charged on all loans and they can be a lot of money. Before you apply for a loan you should have looked at the exit fees and made sure that they are not too expensive as this will limit the opportunities that you will get to refinance. The exit fees that will be payable when you exit a loan will be charged to pay for the administration that will have to be done to close your account. Fixed rate loans will generally have higher exit fees than the variable rate loans as they will be a bit more restrictive.
- Early exit fees. In addition to the exit fees you may have to pay early exit fees. Generally, early exit fees will be payable if you leave a loan within 3 or 5 years of starting on the loan. Some lenders may even have higher exit fees for people leaving a loan within three years of starting to repay the loan. These early exit fees can be very large and you will often find that few refinance options will be viable if you have to pay these early exit fees. Most people will wait out the loan and refinance when they will not have to pay the early exit fees.
- Application fees. Most loans will require you to pay a range of application fees. With your original loan you will have noticed that you will have had to pay a range of application fees and your new loans will likely have most of these. With a regular loan the application fees will include a fee for application, legal fees and perhaps a few more. You should make sure that if you are looking to refinance that the application fees of your next loan are taken into consideration. Some loans may have very low application fees and these loans may be more suited to people who are looking to refinance.
When you are looking to refinance your home loan you should know about all the secrets to successful refinancing. Before you look at refinancing you should have an idea of what you want to get from your loan. Examine the loans and see if are looking for a loan that offers a bit more flexibility or a fixed rate loan if you think that the interest rates will soon rise. By identifying what you want to get from your loan you may be able to decide whether you want to refinance. There are many reasons why people will refinance. One of the most popular reasons that people will be looking to refinance will be because people are looking to save money on the interest rates. Other reason may include wanting to consolidate debts, release the equity in your home for other investors and to fix the interest rate.
Related posts:
- How Mortgage Brokers Can Help with Refinancing
- Can you Save Money by Refinancing
- Refinancing Risk
- Benefits of Refinancing a Home Loan
- How to Refinance an Existing Mortgage with HSBC
- Weighing Up The Costs Of Refinancing
- Refinancing Interest Rate
- When Refinancing Doesn’t Make Sense
- Debt Refinancing
- Exit Fees And Refinancing
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