How to Assess Whether You Should Refinance Your Loan
General Finance Articles > Article: Should I Stay or Should I Go? How to Assess Whether You Should Refinance Your LoanBecause of the state of the economy, many borrowers are looking for financial relief by refinancing their loans. However, many borrowers who rush into refinancing are finding that this strategy does not accomplish their purpose. These borrowers find themselves in a worse financial state than they were before refinancing. For this reason, borrowers should practice extensive research before signing a contract for any loan. Borrowers must place equal importance on the plausibility of being able to meet their monthly payments in the future.
Before the economic downturn across the globe started affecting interest rates on loans, borrowers would be hard pressed to find a lender that would move a variable interest rate beyond the official cash rate (as determined by the RBA). Measuring the benefit of a refinance was easier. A borrower would calculate the difference in loan payments between their previous interest rate and the new payments under the new interest rate. Once the borrower accounted for every cost associated with the loan and refinance, the borrower could then determine whether or not refinancing was worthwhile.
However, this practice is no longer safe for borrowers. Lenders are raising interest rates without considering the rates set by the RBA. Each vendor chooses the timing of these changes independently.
For better or worse, your financial situation has changed since you first signed your loan and you want to consider refinancing. Before discussing your options with a lender, ask yourself the following questions:
- Does your current loan match your lifestyle?
- Are you planning to start a family? How will this affect you financially?
- Would you like to use specific loan features that benefit your needs?
- Are you considering renovating your home?
- Is your fixed rate loan on the verge of expiration?
- Would lowering your interest rate help you make payments in a timely manner?
- Would you like to change your current loan to a fixed or variable rate?
- Could you use the equity in your home for an investment opportunity?
Once you have answered the questions provided, consider the following tips that might help you achieve financial freedom:
Debt Consolidation and Mortgage Refinance
If your mortgage is not your only active line of credit (i.e. credit cards, a car loan, and/or personal loans) you should consider debt consolidation. Debt consolidation is the process by which a borrower takes out one loan to pay off many others. Homeowners who have built equity into their homes should seriously consider debt consolidation so that they can pay home-loan interest rates on their unsecured debts. This creates a great way for borrowers to lower their monthly payments. The extra money saved by doing this will allow them to put some money aside for later mortgage payments.
The Costs of Refinance
Borrowers must consider that the cost of refinancing is not just the difference between their current interest rate and the rate they will begin paying after they have refinanced. Lenders charge mortgage discharge fees that could cost the borrower thousands of dollars. Borrowers who do not plan to keep the new mortgage for several years might not find this worthwhile.
New Mortgage Costs
Advertised interest rates can be misleading. Some advertised rates do not include every loan fee or charge. Borrowers should look that the loan comparison rate as well as the advertised rate. If you are considering refinancing to a 'honeymoon' rate, be aware that this means your rate will increase after a specified amount of time. The low rate that you receive initially is a bargaining chip from the lender to reel you into a new loan. A 5.89% first year rate might turn into a 7.5% rate in your second year of the loan.
Personal Loan vs. Mortgage Refinance
Some borrowers are satisfied with their current mortgage and interest rates but wish to secure extra funds for vacation, renovating their homes, purchasing a car, or any purpose that requires additional funding. By refinancing their current loan, the borrower can tap into the equity of the mortgage. Borrowers who do not wish to refinance can take out a personal loan for the same purposes, however they should be aware that their repayments would be much higher than if they chose to refinance.
If you do not need a large amount of funds, a personal loan might be a better, cheaper option. Researching your options will help you determine which option is best for you.
