What is Refinancing?
What is refinancing and why is it one of the solutions people turn to when they’re in dire financial straits? Is refinancing only ideal when you need help with your mortgage? Are there other ways you can use a home loan refinance?
With the continuing uncertainty surrounding the financial landscape of the country, and the rising interest rates that are making it difficult for people to make ends meet, homeowners look for new avenues to bolster their financial stability and maximise their investments. One powerful tool in this pursuit is home loan refinancing.
In this article, we’ll talk about refinancing basics, home loan refinancing, and what its significance is to a homeowner. We’ll also tackle the application process and what requirements you need to get your home loan refinanced.
Understanding Home Loan Refinancing
What is refinancing and what does doing a refinance mean? According to various dictionaries, refinancing is defined as the renewal of an existing loan or replacing an old loan with a new one. Usually, this new loan comes with more favourable repayment terms or lower interest rates.
When people talk about refinancing, they often think about loans associated with a home or a mortgage. What most people don’t realise is you can also refinance a car loan and sometimes, a personal loan. The most popular refinance however is the home loan refinance, which is what we’ll be delving deeper into here. So, what does refinancing a home loan mean? This is the act of replacing an existing mortgage with a new one. As with other types of refinancing, the purpose of this move is to get more favourable terms of repayment, lower interest rates, or both. You should be aware, however, that these aren’t the only reasons for a refinance. There are a few other reasons why homeowners consider such an option.
Why Consider Home Loan Refinancing?
Now that you know what is refinancing, let’s figure out why people think about refinancing. Here are the main reasons why:
Lower Mortgage Payments
Some homeowners refinance to reduce their monthly mortgage payments. This can happen if they get a new loan with a longer repayment period or a lower interest rate. Lower payments can free up money for other expenses or savings.
Lower Interest Rates
When interest rates drop, people may refinance to get a new loan with a lower interest rate. This helps them save money on interest over the life of the loan, which can add up to significant savings, especially for long-term mortgages. The same can be said about higher interest rates. When interest rates rise, and mortgages rise with it, refinancing to take advantage of lower interest rates along with lower overall payments is seen as the solution to difficulties in mortgage repayment.
Homeowners who have built up equity in their homes might consider a cash-out refinance to gain access to a substantial amount of cash. This means they will borrow more than they owe on the current mortgage and receive the extra money in cash. It’s like getting a loan using the home’s value as collateral. This extra cash can be used for things like home improvements, paying off high-interest debts, or covering unexpected expenses.
Pay Mortgage Faster
Some homeowners want to pay off their mortgage sooner, so they refinance to get a shorter loan term. Shorter terms usually come with higher monthly payments, but they can save a lot on interest in the long run. It’s a good option for those who can afford the higher payments and want to be mortgage-free faster.
Homeowners might refinance to switch to a different lender. This could be because the new lender offers better customer service, lower fees, or more favourable terms. It’s a way to get a fresh start with a new loan provider.
If homeowners have other debts with higher interest rates, like credit cards or personal loans, they might refinance to consolidate those debts into their mortgage. This means they wrap those debts into their home loan, potentially getting a lower overall interest rate. It simplifies payments by combining various debts into a single monthly mortgage payment.
The Steps to Home Loan Refinancing
So, now that you know the answer “what is refinancing a home loan,” let’s take a look at what you should do when you plan to refinance.
Research and Shop Around
Start your refinancing journey by asking a mortgage broker to research and compare interest rates and terms offered by various lenders. A refinance mortgage broker can get this done faster and better for you since they know who these lenders are and which ones offer great terms.
Assess Your Current Loan
Take a closer look at your current home loan – scrutinise your interest rate, loan term, and any fees associated with your existing loan. This review provides a benchmark against which you can measure the other refinancing deals you’re considering.
Next, gather the necessary documentation for your loan application. Your refinancing mortgage broker will tell you what these are, and these can include recent pay stubs, identification, tax returns, and details about your property.
Apply for the New Loan
Once your documents are complete and you’ve filled out your loan application, your mortgage broker will help you apply for the new loan.
Approval and Finalisation
When your application receives approval, you’ll be presented with a formal loan offer. Take the time to review the terms and conditions, and ensure they align with your financial goals. If all is okay, talk with your broker to finalise everything.
During this phase, funds from your new loan are used to pay off the old loan, seamlessly transitioning you into a more advantageous financial position. If you applied for a cash-out refinance, the surplus cash is credited to your chosen bank account.
Working with a Refinance Mortgage Broker
So, now that you’re no longer wondering “What is refinancing” and have a grasp on refinancing basics, your next step is to talk to a refinance mortgage broker who can help you with your home loan refinance. No matter what reason you have for refinancing, know that it’s an option you can take when need it. We here at North Brisbane Home Loans are ready to help you and all you have to do is contact us so we can get started by discussing your individual situation.