As market rates fluctuate each year, there may come a point where you find a mortgage loan with a lower interest rate than the one you currently have. If this is the case, you may be wondering if can you refinance a fixed-rate mortgage to get a better deal.
Refinancing is a great way to potentially save money on a mortgage loan. The process involves applying for a new loan to pay off your existing one, leaving you with a more favourable mortgage loan which has a better interest rate and other similar advantages.
So how does one go about refinancing a mortgage loan? What are the benefits and disadvantages of refinancing a home loan? Here is our guide on how to refinance a property with a mortgage loan.
Reasons to Refinance a Mortgage Loan
- Different lenders will offer loans with varying interest rates. As such, refinancing is a great way to potentially get a better deal that could save you of money.
- Another financial benefit of refinancing mortgage loans is that it may allow you to reduce and consolidate your debts. This can save you time and money when managing your finances in the long term.
- Refinancing is a way to access your equity, which is the difference between the amount still owed on your property and its overall value. You can use this equity to invest in your property and potentially increase your wealth.
- If you are looking to replace a property with a new building or renovate an existing one, refinancing with a construction or line of credit loan may be beneficial.
- If you are wondering how to refinance a house if you have bad credit, try and apply for a better loan once all debts are repaid to potentially access a more favourable rate.
- Should a major life event prevent you from meeting your financial commitments, refinancing may also help you from defaulting on your loan.
Steps to Refinancing a Mortgage Loan
- A refinance mortgage calculator can be a great way to work out the total cost of your current loan. This includes the current interest rate, annual fees and any other extra fees.
- Speak with your adviser about securing a more competitive interest rate. You may not even need to switch lenders as they will likely offer a more advantageous deal to keep you on their books if you are in good standing.
- Compare each loan available and what they offer. Even if a loan offers a better interest rate, there may be other fees involved.
- Once you have found a loan that suits you, calculate the cost of moving to a new lender if applicable. Most lenders will have a discharge fee for leaving a loan early, so use a cash-out refinance calculator to determine if the exit fee will negate the savings of the new loan.
- If you have calculated the costs and found that refinancing is still a viable option, talk to the lender about applying for a new loan. Make sure you have documents related to your personal details, employment and income ready as well as details of your property and current loan.
- After your new loan is approved, your new lender will communicate with your old lender to end your old loan. They will exchange any relevant information and take care of the title transfer.
- Once the settlement stage is reached, you will receive the funds from the new loan to pay off the old one.
The Advantages and Disadvantages of Refinancing Home Loans
Benefits
- Lower Rates – By switching to a loan with a lower interest rate you will pay less on your monthly repayments, you may save a considerable amount in the long term.
- Faster Repayments – Even if you pay the same amount in mortgage repayments, refinancing to a lower interest rate may allow you to pay off your loan faster.
- Access to Equity – With a new loan you can typically borrow up to 80% of your equity amount with good standing. You can then use this amount to fund any renovations or additional property purchases.
- Fix Bad Credit – If your existing loan is in arrears or if you want to consolidate your individual debts, refinancing can be a great way to sort out your finances. This is particularly useful if you are currently on a bad credit home loan and what a better one once everything is in order.
- Better Mortgage Packages – In addition to more beneficial interest rates, refinancing can offer access to other benefits such as extra repayments and offset accounts.
Disadvantages
- Waiting Too Long – The best way to take advantage of refinancing options is to do it as soon as rates are favourable. Should you wait too long you could potentially lose out on savings.
- Increasing the Loan Period – In some cases, it might be necessary to extend the length of your loan. However, the longer your loan period, the longer it will be until you are debt-free, and you may even end up paying more interest over time.
- Refinancing at a Lower Value – Should your property fall in value over time and you are still making only the initial payments on your loan, you may not have enough equity to cover refinancing purposes.
- Too Good To Be True Offers – You may be tempted by introductory rates offered by some lenders that seem outstanding. However, consider the lender’s standard rate as this will be what you will be paying in the long term. If the standard rate is too high, refinancing might not be the best option.
- Poor Comparison Rate – The comparison rate for a loan will show you the true overall cost once you factor in all additional fees and charges. Even if the interest rate seems good, a poor comparison rate might mean you end up paying more.
How LDN Finance can support you
The team at LDN Finance have expertise to support you in finding the right financial deal by considering your net worth, assets and equity along with access to private lenders to broker the best financial deal that suits your needs. To find out more about refinancing mortgage loans get in touch with us today.