Learn the criteria for determining whether to refinance or not.
The refinancing process can be daunting and confusing. It can also make or break your finances. So, before you get caught up in a pile of debt that you have to pay for a very long time, take time to study the costs associated with bad credit refinance home loan.
Here are some factors to consider when deciding to refinance a bad credit refinance home loan:
Lowered interest rate which is computed over the lifetime of the loan.
First, it is wise to reconsider refinancing if it changes the type of interest rate. Let’s say, Johnny originally took out an adjustable-rate mortgage with a 4-year fixed period. That means, when the 3-year period expires, the interest may fluctuate from time to time. If you don’t want to worry about the rates going up or down, it may be time to consider refinancing your home. Second, the new interest rate is at least 1% less than your current rate.
Supposing you currently have a 30-year fixed-rate mortgage loan for $400,000 with a 6.5% fixed interest rate. The new rates are at 5.5% interest. This could definitely reduce your monthly payment by over a hundred dollars and more than a thousand dollars in a year.
Longer loan term or period of amortization.
Let’s say you originally got into a 15-year home loan. To lower your monthly payment, you can switch to a 30-year mortgage through refinancing.
The overall savings is worth the transfer costs.
Loan redemption charges, admin fees and other costs of transfer are examples of once off transfer costs.
For example, the closing cost amounts to $4000 and your mortgage has more than 40 months on its term. If you can lower your interest rate by 1% p.a. and save roughly $100 a month in installment payments, you can save as much as $12,000 in the next 10 years.
If you divide $4,000 by $100, the break-even point, or the point at which you recover the $4,000 is 40 months (4000/100). In case you leave your home after two years that savings come to $2400 only. If you are not going to stay at least another 40 months in your house, then refinancing may not be a good option.
Assuming that the terms are the same, always calculate the savings and compare it to the refinancing fees before signing up your refinance application.
Is it wise to refinance my home loan?
Refinancing is all about crunching the numbers. Calculate the savings based on the changes in interest rates, loan amortization period and refinancing costs. If you can lower the payment every month and recoup the transfer costs within a year or two, go for it. Shortening the loan term is an added bonus.
There are many advantages of refinancing your mortgage. You can lower the interest paid over the loan’s lifetime, reduce your monthly payments and the total payments over the life of your loan. But, you have to consider the fess you need to pay to obtain the loan, the principal amount and the loan term. Remember that it is still a loan and you have to repay it. If you think you have the financial capacity to pay it off for another 15 years, then shifting from a 15-year to a 30-year mortgage may not be a bad idea after all.
Contact Australian Lending Centre today to learn more about bad credit refinance home loan.