Refinancing Your Home Loan - What You Need To Know

Taking out a home loan is one of the biggest financial investments most Australians will make in their lives. Most people will spend 15 to 20 years making repayments on their mortgages, so it's understandable that one of life's turns for the worse may affect this financial obligation.

The unexpected events that often occur in life can take us by surprise and cause an incredible amount of stress - especially when they get in the way of our obligations, like attending work or making monthly home loan repayments.

If you are faced will long-term illness or other circumstances that prevent you from being able to adequately make your repayments, there are a few options available to you.

Refinance your home loan 

Refinancing your home loan is one such option. Refinancing means replacing your existing debt obligations with a different, more manageable loan complete with a new set of circumstances for repayment.

Loan refinancing isn't just an option for those in financial distress. Often refinancing your home loan allows you to take advantage of a better interest rate, reduce your monthly repayment amount, or simply free up some cash in your pocket.

One of the best reasons to refinance is to simply lower your interest rate. The interest you pay on a home loan is considerable - especially when you factor in the length of time involved and the amount of repayments you'll be making over your lifetime.

A general rule of thumb when it comes to considering refinancing is that if you can reduce your interest rate by two per cent, it could be worth doing.

But reducing your interest rate doesn't only help save you money by reducing your overall monthly payments - it can also help to increase the rate at which you build equity on your home.

Another refinancing option available is to shorten the term of your loan. This will increase the amount of your monthly repayments in the short term. However, reducing the total amount of time you have to actually make repayments can end up saving you money overall. 

The same rule applies in the opposite direction. It's possible to increase the term of your home loan for lower monthly repayments. But this has the drawback of extending the time you will be making repayments and, ultimately, could end up costing you more money.

Loan options 

Changing the type of home loan you have could also make a difference to your repayment schedule and financial situation.

If you have a variable home loan, your repayments are at the whims of the market. As interest increases or decreases, so do your monthly repayments.

When you switch to a fixed home loan, it's possible to set your interest rate in stone - giving you more financial freedom by knowing exactly what you owe each month.

Refinancing is an option for those who wish to tap into their home equity. If you have home renovations or some unexpected expense suddenly pops up, you may be able to access your properties equity in order to pay the necessary expenses.

Home equity is the dollar value difference between what you still owe on your mortgage and the overall value of your property.

If you refinance for a greater amount than what you owe on your home, you can receive the difference in cash. However, it is worth remembering that when you take out your home equity, you own less of your home.

It will take time to build that equity back up. If you decide to sell your house, you won't net as much for the sale as you would have before.

Furthermore, if you have outstanding personal debts, such as credit cards, and you're struggling with repayments, you can consolidate your debts into one easy-to-manage loan.

Refinancing your home loan alongside this consolidation can dramatically help you cope with any financial hardship or surprises that may arise. 

Online Tools 

You can make use of an online home loan calculator to compare the benefits of refinancing your home loan with your current loan situation in order to make an informed decision.

However, this will only be an estimate. If you're seriously considering refinancing as an option, it's best to get in contact with a mortgage broker before making any life-changing decisions.

Getting some expert advice from a professional will help you to evaluate your situation and make the best decision for your circumstances.

After all, while refinancing your home loan can be great for reducing your monthly repayments, lowering your interest rate and building equity, there are a number of costs involved with the process.

It generally costs around three to six per cent of the loan's principal to refinance. While you will reap the benefits of lower costs immediately, it can take years before you recuperate from the cost of refinancing.