Mortgage refinancing is replacing your current home loan with a new one.
Making a decision to refinance while mortgage rates are low can save you money. However, a hot property market doesn’t always translate to the best time to refinance.
While mortgage refinancing can be a solution to many home loan issues, like high monthly payments and interest rates, there can still be reasons not to refinance your home (right away).
5 Reasons Not To Refinance Your Home Right Away
Here is when you shouldn’t be thinking about refinancing:
When Your Credit Score Is Not At Its Best
Similar to when you apply for a home loan to purchase a home, there are certain credit requirements that lenders need you to meet to get (fast) approval for mortgage refinancing.
Your credit score also plays a huge role in helping you qualify for refinancing and favourable interest rates. Before you make a refinancing decision, make sure you have a good credit score.
When You Don’t Want Additional Expenses
With mortgage refinancing comes extra costs like discharge costs and break costs.
These costs are usually paid in cash at the time of closing. If you wish to reduce your upfront costs, you can roll your costs into the amount of the loan. The other option is to have your lender cover these costs in exchange for a higher interest rate.
Either way, discharge and close costs count as additional expenses. If you can’t seem to bear the burden of any more expense right now, mortgage refinancing might not be the best option.
If this is your situation, come to Home Loan Experts when you’re ready to take on the added costs of refinancing. Our mortgage brokers will gladly take you through the lender options in our panel.
When You Aren’t Looking Forward To Higher Long-Term Costs
When you refinance your mortgage, you are basically resetting the clock on your loan term. This is why refinancing can cost you more money in the long run.
While refinancing into a mortgage with a lower interest rate seems like the best way to save a certain amount each month, the overall cost of the loan must be considered.
For instance, say you bought your house using a 30-year mortgage initially and then decided to refinance after paying down your mortgage for a few years. Choosing to refinance into another 30-year mortgage might not be the best plan at that point.
On the other hand, you might prefer a shorter term than you originally went for (say a 15-year mortgage). This can raise your monthly costs but save you a lot more money in the long run.
When You Don’t Have Enough Equity
The total value of your home minus the amount you still owe on your mortgage is called equity. To be eligible to refinance your mortgage, lenders will require you to have a certain amount of equity. You can use that equity for various investment and saving purposes. Cashing out your equity and refinancing might not always be the best solution.
Until and unless you are sure you will be able to cover your long-term mortgage payments, we suggest leaving your equity alone. Using it up might make you feel like you have enough money on hand, but the risk of losing your home if you can’t keep up with loan payments will still be there.
If you need to decide whether to cash out your equity or save it, we can help you reach the ideal decision. Give us a call on 1300 889 743 or fill in our free assessment form.
When You’re Planning To Move Out Soon
Refinancing doesn’t make sense if you aren’t planning on staying put.
If you plan on moving out and selling your house in the near future, the short-term costs of refinancing will definitely outweigh its advantages (lower interest rate, for example).
Before refinancing your home loan, calculate whether the new loan will take you past your break-even point. This is the point when the savings from refinancing your mortgage cancel out the refinancing costs. If a new home loan doesn’t at least get you past the break-even point, you should consider not refinancing or find a better deal. Your break-even point is calculated based on your closing costs and new interest rate.
Our break costs calculator will help you estimate your break-even point.
How Often Can I Refinance My Home?
Apart from lenders setting their own limits, there is no regulation on how often you can refinance your home. Your refinancing ability, like your chances of getting an initial home loan, depends on various elements like your credit score and the equity you have in your home.
Generally, if your credit score is lower than the last time you refinanced, there’s a high chance your lender may decline your refinance application. Trying a different lender is always an option! Home Loan Experts can help you find the best one for you.
Also, your fees and closing costs might take years to recover every time you refinance. And doing it too often can also make a dent in your credit score.
I Don’t Want To Refinance Right Now, What Are My Options?
While there are many good reasons to refinance your mortgage, it might not be possible or preferable in all situations.
Here’s what you can do if refinancing doesn’t fit your plan:
Take A Line of Credit
A line of credit makes the most sense if you have ideal home loan terms already and don’t need a large lump sum. It usually costs much less than refinancing a mortgage. It also takes less time to close, which works to your benefit.
Take A Personal Loan
A personal loan will get you through debt consolidation, home improvements, purchases and other similar expenses. Also, personal loans take much less time to repay than mortgages do.
While a mortgage takes 15-30 years to be fully repaid, personal loans take only about five years. Also, a personal loan might help your credit score go up by adding another line of credit to your credit history.
Add A Second Mortgage, Refinance The First
Depending on how much cash you need, it’s sometimes less expensive to refinance your first mortgage to a cheaper rate loan and then add a new mortgage.
You can use the second mortgage for a fixed home equity loan or a home equity line of credit. Whichever fits your financial situation the best.
Access Other Sources Of Cash
Find a guarantor, borrow from family, apply for zero-interest balance transfer credit cards – there are many alternatives for financing. Many of these options can help you reduce your debt load with better terms than mortgage refinancing.
Our experts can help you find options that fit your mortgage needs and help you with financial planning.
Consider Your Options
A recent survey by TheAdviser showed that 6 in 10 Aussies haven’t reviewed their loan to refinance. Reviewing your loan doesn’t always mean refinancing, and by not reviewing in the first place, you’re blocking your chances of getting a better rate. It’s always better to consider your options before you reach a decision.
Whether you want to save money in the long term or short term, use your home equity or hold your existing mortgage, we can help you find the best path to your financial goals.
Contact our mortgage experts at Home Loan Experts, we’ll find the right solution for you right now, even if it isn’t refinancing. And later, if you decide the time is right to refinance, we’ll be there to help you get the best deal.
Give us a call on 1300 889 743 or fill in our free online enquiry form.