Many people believe now is a very sensitive time to refinance a mortgage. And this is particularly true if you make less than 7,570 AUD each month.
According to the International Monetary Fund, global growth will slow down to 2.7% this year, while inflation will drop by only a percent or two. You can expect inflation to stabilise at 6.5 percent.
Given this, house mortgage rates are expected to rise in 2023. Does that mean it’s time to refinance? Or does it mean you should avoid refinancing at the moment?
That’s exactly what we’ll explore in this post. Let’s go!
What Does It Mean to Refinance a Mortgage?
When you have a mortgage, you pay a monthly amount to the lender (or the owner of the house) and build equity in the property.
The total amount you pay back comprises both the principal and the interest. And the average interest rate for a 30-year fixed mortgage is about 5.0 percent. If you opt for a 15-year fixed mortgage, the interest rate lowers to 4.5 percent.
It is possible to lower the interest rate further by refinancing your mortgage loan. This means you will still have the same house, and you will still have to buy it eventually (i.e., by paying monthly amounts to a new lender). But the amount you pay every month might be lower than what you currently pay.
In other words, you’re basically replacing your home mortgage with a new one. You can do this by going to a new lender, or you may change the terms and conditions of your loan with your current lender. You can read Westpac’s article for more information about how the process actually works.
Benefits of Refinancing Your Mortgage
Suppose you have a mortgage of $300,000 at an interest rate of 5 percent and are paying approximately $1600 per month.
If you refinance your mortgage, you might be able to secure a loan with a 4 percent interest rate. This means you’ll be paying around $1400 every month and saving approximately $100 – $200.
You can use the saved amount for medical emergencies, educational expenses, home improvement, upgrading the quality of your life, or building other real estate assets.
You can also use mortgage refinancing to shorten your mortgage length. Instead of paying monthly instalments for 30 years, you might be able to secure a 15-year plan. As you can imagine, this can take a lot of stress off your shoulders and make you a homeowner quicker.
Another great advantage of refinancing is converting an adjustable interest rate to a fixed rate that does not get affected by economic changes.
How to Refinance Your Mortgage?
Refinancing a home mortgage is a lengthy and detailed process. Make sure you give it enough time and thought.
Begin your journey by setting up a clear financial goal. Usually, there are only two goals with refinancing:
- Lowering the interest rate
- Shortening the mortgage term to acquire equity sooner
Once you have a clear financial goal in sight, check your credit score. People with bad credit can also refinance their loans, but it’s usually with no gains. Good credit helps you get the best interest rates and loan terms. Ideally, you should have a credit score of 620 or above. If you don’t, you should first invest time in fixing your credit score.
If you have a decent credit score, check out your home equity. The higher home equity you have (on your current loan), the better rates you can get. If your home equity is lower than 5 percent, do not opt for refinancing as you won’t be left with much after paying the closing costs.
If your home equity is 10-20% or more, consult 2-3 mortgage lenders. Compare their rates and offers and choose one. You will then need to arrange your documents and get an appraisal. Before the appraisal, invest a small amount in budget-friendly home improvement projects. They can raise the price of your property significantly.
When to Refinance Your Mortgage?
As mentioned earlier, refinancing a home mortgage begins with a financial goal. So, it’s a good idea to refinance your home as soon as you have a financial goal and a financial need in sight.
You don’t want to wait for the market to have a favourable environment. The mortgage market has only ballooned in terms of money since the pandemic and is likely to get tougher.
In addition to financial goals and needs, make sure you have the following before refinancing:
- A good credit score and history
- 20% or more home equity
- A good debt-to-income ratio
On the other hand, do not consider refinancing if you have an interest rate lying between 4 and 5 percent. That’s because, in today’s time, that’s the best rate you can get. If you refinance, you’re probably going to get a higher rate than this, making it a bad deal.
And That’s a Wrap
We hope you’re now more clear about whether you should refinance your mortgage. For more helpful mortgage information, check out our blog post on Why Do People Apply For Home Loans?