- Lower Monthly Payments
- Stabilise Your Loan Rate
- Pay Off Your Debt Sooner
Refinancing a loan in the simplest terms means to swap a loan out for another one in its place. This ‘swapping out’ can take form in a couple of different ways. The borrower can replace their loan with another loan from the same lender with different terms and rates. The other way is for the borrower to use a different lender entirely from the original lender and have this new lender assume or take over the original lender’s note.
There are plenty of reasons for a homeowner to desire a refinance on their home loan.
- Saving Money: Refinancing can allow the borrower to take advantage of a better deal, such as lower interest rates, which can end up saving a lot off the lifetime loan cost
- Borrowing More: It’s also possible to change the size of the loan, like increasing the total amount borrowed, if the lender is changed
- Restructuring: It can be common to move from P&I (principal and interest) repayments to IO (interest-only) repayments.
- Bundling: Moving all the financial needs to one single banking company can help a borrower to get package deals or other institutional benefits
- Consolidation: There may be potential to group several debts into the one loan product. It is often wise to also seek financial advice before consolidating debts, as there could be associated risks that come with it
There are a few different approaches to refinancing a loan for home-owners, but the first start is to check the loan details and work out what you’re currently paying, then looking into what interest rates are currently on offer in the market.
1. Personal Financial Documents:
Getting all of your personal financial documents in order is the first step in the refinance process. The bank will need these documents to assess your credit risk. If possible, you should get a copy of your Equifax credit report listing your current score. You should also have your last three years of bank statements and tax returns as well.
2. Documents Pertaining To The Original Loan:
These documents will have all of your mortgage information on them including details of the home (square footage, age of the house, etc.) and the financial terms of the mortgage. The lender will look through these and make note of how much equity you have in the home.
3. Shop Around For The Lender Of Your Choosing:
You should check different lenders to see what they require in terms documents needed to start the process. This is also a good time to check for different rates and terms that are more favourable to you. Also, if you have questions about the lender or the process itself, make note of those as well, as you can ask the refinance officer at your consultation to get detailed answers to these questions.
4. Background Check Your Lender:
Once you’ve selected a small group of lenders to finalize and choose from, this is the time to do some digging. Check each lender’s track record and if possible, check reviews online by other applicants as to the process. How long has the lender been in business? Was it a pleasurable experience? Were there any snags involved? Are there any hidden fees or costs not mentioned at the consultation? These are all things you should look out for when selecting a lender to get a refinance.
5. Lender Consultation and Application:
This is the time to consult with the lender to give them all of your documentation and to answer any questions that you may have. The refinance lender will do their best to find the best rates and terms coupled with your credit risk and monthly income to have a satisfactory outcome for both homeowner and lender. Once you’re approved, the lender will assume your original mortgage on their new terms and conditions.
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Frequently Asked Questions
Refinance is a loan type for when borrowers want to change the current loan they have to another loan product or another lender…or both. It is mostly similar to any other type of loan and can be made available with varying different types of terms and conditions. It is usually possible to refinance any type of loan, such as home loans, personal loans, business and car loans.
You can refinance with your current bank by asking for a better deal, or asking to change to a different type of loan. You can also refinance with another lender, and what means is going through that other lender’s process for application. If your application is successful, the new lender typically will arrange for the previous loan to be ‘discharged’ and then transferred over. There could be fees and charges involved with refinancing.
Whether or not it is good to refinance a mortgage depends on many factors, such as the conditions of your current mortgage, the deals and home loan rates available in the wider home loan marketplace at the time you’d like to refinance, and whether or not you can qualify for a new loan. However, in general terms, one possible outcome of refinancing a loan could be to reduce the cost of the loan. If that is the case, this could be a good thing if you are trying to balance your budget. It’s important, however, to fully understand all of the financial implications of refinancing, which could include extra fees or a longer loan term (which could make your loan more expensive overall), so it could be wise to consider financial advice before jumping in.
When you refinance a home loan, your previous mortgage is typically discharged – or closed. The balance owing on the loan is transferred to the new loan (which could be with a new lender). You then begin paying off that loan under the terms and conditions of the new loan. This could mean a different repayment amount or method of payment.
The term “interest rate” means the amount of money you will have to pay or will receive from a bank, when you use one of its financial products. It is expressed as a percentage. When someone borrows money from a financial institution, the lender will charge interest on that loan – an extra amount of money the customer has to pay on top of their loan installments. It’s the main way banks make money from loans. Conversely, when someone deposits money in a bank, the bank will pay that customer a percentage of that money back in interest, depending on how long they keep those funds in that bank. It’s why people choose to put their money in a bank. Banks then use this deposited money to fund loans to other people, among other things.
A favourable interest rate can be evenly compared with similar products from other establishments. Before committing to a financial product, it’s a good idea to not only consider the interest rate, but also the features and costs of the product. For instance, when a loan is taken, it can be very good for the borrower to make sure the loan has the features they want.
