Understanding Mortgage Refinance And Home Equity

If you have an investor mindset, you don’t think of using your home equity without considering refinancing. Similarly, if you are a homeowner looking to manage your debt, you also have to consider your home equity before deciding to refinance.

The concepts of mortgage refinancing and home equity are closely related. Having a clear understanding of both is crucial if you want to make the most of your home loan.


What Does Refinancing My Mortgage Mean?

Refinancing refers to changing your current home loan to a new one or switching to a whole new lender.

Refinancing helps you:

  • Receive cash-outs
     

    A mortgage cash-out is when you release funds from your home against the equity you have built using a home equity loan. Refinancing helps you cash out up to 90% of the property value if you provide a stated purpose.
    Receive refinance rebates

    Banks get competitive while pursuing you to refinance your mortgage with them. So, some banks even offer a cashback scheme based on the loan amount you decide on refinancing.

    Refinance rebates offered for a particular loan amount differ across banks. The most common refinance rebate provided by banks is $2,000 for loan amounts greater than $250,000.

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  • Consolidate debts
     

    Refinancing helps you maintain all your debts under a single mortgage.

    While refinancing your mortgage, you have the option to increase your loan amount using the home equity you have built over time. The increased loan amount could cover all your existing loans. As mortgage rates are lower than most loan rates, repaying your loans would get easier through debt consolidation.

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  • Get better interest rates
     

    Getting into a fixed-rate mortgage plan when rates are high is something a borrower regrets sooner or later. A smart way out of a high-interest rate mortgage plan is through a refinance. This gives you the option of selecting competitive mortgage interest rates that give you a better value than your existing plan.

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  • Manage your mortgage under more flexible policies
     

    A mortgage is one of the biggest debts you can keep. So, you would ideally want to pay it down quickly or at least have flexible terms that allow changes when you need them.

    Some lenders have rigid policies that restrict your mortgage repayments from being flexible. You could get out of such mortgages through refinancing so you can:

    • Make extra repayments
    • Get an offset account that reduces your mortgage costs
    • Increase your repayment frequency
    • Switch from an interest-only repayment plan to a principal-and-interest repayment plan to pay down your mortgage quicker

  • How Much Equity Do I Have In My Home?

    Your total home equity is the difference between the value of your home and the amount you owe to your existing lender.

    To find out your total home equity, use the home equity calculator below.

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    Disclaimer: This calculator is to be used as a guide to help you better understand your options. We have not assessed what options are suitable for your needs or if you meet other lending criteria that would allow you to access your equity. Any repayments quoted above are calculated using your current home loan balance over a term of 30 years. We strongly recommend that you make additional repayments and pay your loan off sooner. If you borrow over 80% of the property value, then you may pay an LMI premium.

    The property equity calculator simply deducts your home loan amount from the estimated value of your home.

    Calculate my equity equation: property value – loan amount = equity

    For example, if your home is worth $500,000 and you owe $200,000, then the calculation would look like this:

    $500,000 – $200,000 = $300,000 in equity

    Not sure how much your property is worth? We have written a guide to help you estimate the value of your home.


    Minimum Equity Required For Refinancing

    Generally, you need at least 20% total equity in your home to refinance the loan. Lenders typically let you borrow a maximum of 80% of your property’s value on a standard mortgage so most homeowners begin with enough total equity to refinance.

    Some lenders will let you borrow up to 95% of your property value if you pay Lenders Mortgage Insurance (LMI) or if you have a particularly impressive credit score. If you have less than 20% total equity in your home, you may still be able to refinance but you may have to pay LMI again.

    Lenders don’t usually allow you to access all of the equity in your home. Your usable equity is typically calculated as 80% of the value of your home, minus the amount owing on your loan; for example, if your home is worth $1,000,000 and you still owe $500,000 on your loan, then your usable equity is $300,000:

    $1,000,000 x .80 = $800,000

    $800,000 – $500,000 = $300,000

    Your usable equity is the amount you can access via refinancing. The amount varies depending on what kind of property you are refinancing and what you intend to do with your released equity.

    Lenders prefer refinancing mortgages with higher equity. We suggest you look at equity criteria for each type of refinancing, rather than assuming the minimum amount of usable equity will qualify you in every case.


    How Much Equity Do I Need To Buy Another House?

    You can refinance to use the equity in your house to purchase an investment property. You could also refinance to consolidate the amounts you owe on your owner-occupied house and your investment property.

    If you have lived in your home for more than five years, you should have accumulated enough equity to pay for the deposit, stamp duty and other legal fees. Typically, lenders can accept up to 80% of the equity on an existing property to finance the purchase of an investment property.

    Note: You will need to get your house appraised for its current value to determine exactly how much equity you have.


    How Much Equity Do I Need To Refinance A Rental Property?

    Refinancing your investment property loan can help you:

    • Pay a lower interest rate
    • Diversify your property investment portfolio
    • Claim tax deductions for borrowing costs and exit fees

    To refinance a rental property, you need to have a Loan-to-Value Ratio (LVR) of 75% or less; lenders require you to have 25% or more total equity.


    How Much Equity Do I Need To Refinance With A Cash Out?

    Cash-out refinancing is taking out a loan to replace your first mortgage with a larger mortgage and receiving the difference in cash. To qualify for this, it’s best if the value of your property has increased since you bought it. This is because conventional loans require you to maintain 20% total equity in your home. So, while refinancing for cash out, you are limited by not being able to increase your LVR above 80%.

    Lenders that accept unconventional loans can let you cash out an amount that will place your LVR above 80% of your home’s value.


    Can I Refinance If I Have No Equity?

    Yes, you can refinance your home loan even if you have little or no usable equity in it, but the options are limited.

    You could refinance your home loan with a guarantor loan. Having a guarantor will help boost your borrowing capacity as they take the responsibility of repaying your loan if you default.

    You could look for specialist lenders that refinance mortgages even for borrowers with extremely low home equity.


    Tips For Accessing Your Equity

    Here are some tips to help you get the best deal when refinancing to access equity:

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