When to refinance
Getting a home loan is only the first step. You then have to make sure you keep an eye on home loan interest rates, so you can switch when it makes good financial sense.
What does refinancing a home loan mean?
Refinancing a home loan is when you take out a new loan to pay off your existing one. This is usually done either to get a better rate, or consolidate debt.
The hard part though, can be deciding which type of refinancing is right for you. Read on to find out more.
Using refinancing to get rid of Lender’s Mortgage Insurance
If you required Lender’s Mortgage Insurance (LMI) when you first took out your loan, you may be able to use refinancing with your current lender to score a partial refund on LMI.
How? In some cases, mortgage insurers will refund 40% of your LMI premium if you pay back the loan within the first year (or 20% if it's repaid within the first one to two years). After two years have passed, typically no refund is offered. So, if you manage to pay down your loan quickly and opt to refinance with the same lender, you can use this partial refund to help pay for the costs of refinancing. Please note that these requests are assessed on a case-by-case basis and it is best to speak with a Qantas Money Home Loans expert to discuss if this is an option available to you.
Cash-out vs rate-and-term: which refinancing option should you choose?
The most common type of refinancing, a rate-and-term refinance, is designed to change your interest rate and/or the term of your loan - while keeping your loan amount the same. Though you will have to take the extra cost to refinance into account.
A cash-out refinance on the other hand, is done when you want to borrow a bit extra on top of your existing loan. This means converting some of your home’s equity to increase your loan’s principal amount. The benefit of a cash-out refinancing is that you'll get extra cash in hand to put towards things like renovations or repairs.
The downside however is that because this loan may be riskier for some lenders, in some cases, you may pay a higher interest rate.
Whichever option you choose, it’s important to run the number and figure out which type of refinancing is right for you.
How long does it take to recoup the costs of refinancing?
Before you refinance, keep in mind that it usually comes with extra upfront costs. How much will you pay? That depends on a number of factors, such as whether you stay with the same lender or take your loan to a different provider.
So before you get started, it’s important that you work out your ‘break even point’. The break even point is when the amount you’re saving outweighs how much it cost you to refinance.
To work out this out you need to:
Add up all the costs of refinancing (including the cost of closing the old loan as well as opening your new one).
Calculate how many months it’ll take for you to break even. You can work this out by dividing your total refinancing costs by your monthly savings. For example, if it costs you $3,000 to refinance and you’ll be saving $100 a month on this new loan, that means it’ll take you 30 months to reach your break-even point.
Not sure whether it’s worth refinancing?
It of course depends on your current situation and goals, but if you would like any help deciding whether refinancing is right for your situation, feel free to give Qantas Money Home Loans a call on 1300 992 700. Our home loan specialists will be happy to chat through the options with you.
* You have to be a Qantas Frequent Flyer member to apply with Qantas Money Home Loans. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.
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