A home loan is a long agreement that typically last 10, 20, possibly even 30 years. Over this time, a lot of things can change in a persons financial situation. Fortunately, the terms of a home loan contract arent permanent. It is possible to switch a home loan through something call a refinance.
What is a Home Loan Refinance?
A home loan refinance replaces an old home loan with a new one. Basically, the lender pays off what s left in the old home loan and creates a new loan. This lets the homeowner adjust the terms of a loan to better fit a different situation. Homeowners can refinance with their original lender or switch to a new bank. They have the flexibility to go with whichever company offers the best deal for the new home loan.
Reason to Switch 1 – Lower Interest Rate
One popular reason to switch home loans is when a homeowner can find a lower interest rate. Since a home loan is for so much money, even a small reduction in the interest rate can mean hundreds if not thousands in savings. One reason why the interest rate would be lower is because the borrower finds a better deal. Perhaps the homeowner finds a lender with better rates or maybe interest rates across the country have fallen. Either situation works.
A homeowner can also get a better rate by refinancing with a better credit score. If homeowners make all their loan payments as scheduled, their credit scores will get better so it can be a good idea to refinance a few years into a home loan. There is a fee for switching a home loan so Australians need to double check the numbers with their lender to see if the swap makes financial sense.
Reason to Switch 2 – Change the Length of the Loan
Switching loans also gives the homeowner a chance to change the length of the home loan. If the owner is making more money and wants to pay off the loan faster, this change is possible. If the homeowner wants to reduce the monthly payments, switching to a longer home loan would make this possible. Refinancing gives the homeowner the opportunity to find a payment schedule that works.
Reason to Switch 3 – Cash Out Equity
As homeowners pay down their home loans, they start to build value in their properties as they own more and more of the homes debt-free. This value is known as home equity. A homeowner can cash out some of this value with a refinance. In this case, the lender sends out a check for the money that is being cashed out and adds this value back to the home loan. This works out well if the homeowner needs money fast for something else.
Homeowners should always keep in mind that they aren t locked into their home loan agreement. When these situations come up, it definitely makes sense to switch to a better loan.
When considering taking out a home loan, it is always important that you shop around to get the best interest rate possible. Here are a few places where you can start your research:
This was a blog post by Lara Seers. Lara is a real estate agent for properties in Queensland. She is a professional finance writer specialising in home financing across Australia.