You may have heard a lot about the mortgage term ‘refinancing’. Used effectively, refinancning your home can be a great way to consolidate debt, release home equity and get a better interest rate.
To refinance your mortgage (or home loan) refers to the replacement of an existing home loan with a new home loan, with different terms and usually increased savings.Top Reasons People Refinance their Home LoanThe top reasons people refinance their mortgage includes:
To get a lower monthly mortgage payment – this is achieved by refinancing into a new, lower-rate home loan. It could be a fixed rate loan, a variable rate loan or a split rate loan (which is a combination of both).
One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.Investopedia
Refinancing Your Home To Consolidate Debt
Like the majority of Australians you could have a number of debts – generally a home loan, personal loans, and the dreaded high interest credit card balance. These multiple debts involves juggling lots of different repayments of different amounts at different times of the month.
If you refinancing your home loan you could provide an opportunity to simplify your debt. This has the potential to reduce the high interest you may be paying on all your debts. This process is called ‘debt consolidation’. Debt consolidation combines several high interest debts into a single lower rate debt, possibly your mortgage, which could reduce, or at the very least simplify, your total monthly repayments.
Do note however that debt consolidation has some negatives. A short term loan such a personal loan becomes a long term debt (your mortgage), and that can result in interest on the balance for a longer period. If you aren’t savvy, it could cost you more in the long run.
Debt consolidation can be truly cost-effective, if you commit to making additional repayments to pay off the bigger loan as quickly as possible, thus taking advantage of the lower interest rate.
Refinancing a home loan to access home equity
Your home is probably one of your most valuable assets. With optimising you home equity you can work towards building additional wealth or achieve personal goals.
You can refinance your home loan to draw cash from your home’s equity for the purpose of either debt consolidation, home renovations, investments or simply to have access to some extra cash.
To reduce or alter risk
If you currently have a variable rate home loan, but now feel as though you would benefit from fixed payments, you can refinance your home loan into a new fixed rate loan to better meet your changing needs (or vice versa: change a fixed rate to a variable).
To pay off your mortgage sooner
If you want to pay your home loan off sooner, you can build up the equity in your home quicker by refinancing into a new home loan that allows you to accelerate your repayment schedule.