All You Need To Know About Home Refinance Loans Pros & Cons
Universal Finance • September 30, 2024
Whether you’ve been paying attention to the latest market movements or looking for ways to create more breathing room in your budget, you may be considering refinancing. Put simply, refinance home mortgage loans refers to replacing your current home loan with a more competitive offer.
However, it's essential to understand both the advantages and potential drawbacks of refinancing before making a decision. That's why, in this blog, we’ll explore the benefits of refinancing, helping you determine if it's the right choice for you.
Pros of home refinance loans
1. Possibly get a lower interest rate
One of the main reasons homeowners opt for refinancing is to take advantage of the lower interest rates. Securing a lower rate can significantly reduce monthly mortgage payments and the total interest paid over the duration of the loan. With a more competitive interest rate working in your favour, you can look forward to the following financial benefits:
- Lower monthly payments — A lower interest rate can reduce your monthly mortgage payments, freeing up cash for other expenses.
- Long-term savings — Even a slight reduction in the interest rate can lead to substantial interest savings over the term of your loan, allowing you to use your income towards other financial goals.
2. Use the equity for cash
The benefits of refinancing enable you to tap into the equity you’ve built in your home, turning it into cash that you can use for various purposes, including:
- Home improvements — Use the funds to renovate or upgrade your home, potentially increasing its value should you ever decide to sell. Projects such as kitchen remodels, bathroom makeovers or adding a deck can enhance your home's livability and market value.
- Debt consolidation — Pay off lingering, high-interest debts, such as credit cards or personal loans, through debt consolidation. This can simplify your finances, reduce the stress of paying off multiple debts and save you money on interest payments.
- Major purchases — With your newfound funding, you can finance significant expenses like education, medical bills or a new car without taking on additional debt.
3. Lock in your rate and feel more secure with your monthly repayments
If you currently have a variable rate, refinancing to a fixed-rate loan can provide greater security and predictability in your monthly payments. Here are some of the most common benefits of switching to a fixed rate:
- Predictable payments — Fixed-rate loans offer consistent monthly payments, making it easier to budget, manage and plan your finances.
- Protection from potential rate increases — Locking in a fixed rate protects you from potential interest rate hikes, providing peace of mind and financial security.
Cons of home refinance loans
1. Refinancing can be expensive
Refinancing involves various costs and fees, which can add up and potentially offset the savings from a lower interest rate. This can include:
- Closing costs — These can include appraisal fees, origination fees, application fees and more, which can range from 2% to 5% of the loan amount.
- Break-even point — It’s crucial to calculate the break-even point, which is when the savings from the lower interest rate outweigh the refinancing costs. If you plan to move or sell your home before reaching this point, refinancing might not be worth it.
2. You may encounter lower-than-anticipated appraisals
A lower-than-expected home appraisal can impact your ability to apply for a home refinance loan, particularly if you aim to cash out equity or secure a lower interest rate.
- Equity requirements — Lenders may want to see a specific amount of equity in your home to approve a refinance. A low appraisal can reduce your equity, making it harder to qualify.
- Higher interest rates — If the appraisal comes in lower than anticipated, you might end up with a higher interest rate or less competitive loan terms, which could negate the financial benefits of refinancing.
3. It may not be worth it
In some cases, refinancing might not provide the financial benefits you’re hoping for, and it could even be not worth the effort. Here are a couple of things to be aware of:
- Minimal savings — If the interest rate reduction is minimal, the savings might not justify the refinancing costs. You need to carefully analyse whether the potential monthly savings are enough to make refinancing worthwhile.
- Extended loan term — Refinancing to a new 30-year loan can extend your repayment period, potentially increasing the total interest paid over the life of the loan. While your monthly payments might decrease, you could end up paying more in interest over time.
Work with Universal Finance Corporation — Sydney’s most trusted mortgage brokerage firm
If you’re thinking about refinancing your home loan, the team at Universal Finance Corporation can help you find the right solution. We partner with a wide pool of lenders, from major banks to non-bank lenders, to ensure you receive the best refinance rates for home loans for your circumstances.
We’ll discuss your goals, borrowing capacity and other factors that make up your financial profile so we can make sure you’re matched with the most appropriate solution. Book a consultation today and discover how we can help you switch to a more competitive home loan.
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