If you’re considering refinancing a home loan, you need to be sure of the benefits you’ll get before you go ahead. To help you in your decision to refinance or not, here are 7 benefits that can be obtained when refinancing home loans.
7 benefits of home loan refinancing:
- Lower repayment – Extra money in your pocket.
If you get a replacement home loan with a lower interest rate and at least the same loan term, you will prove your cash flow since your new home loan repayment will be lower than your current repayment. If you negotiate a new loan term that is longer than your current loan term, it will also reduce your repayment. By choosing an interest-only loan repayment, you will also reduce your monthly repayment compared to a principal and interest loan repayment.
- Shorter Loan Term – Own Your Home Faster
You can request a shorter loan term with larger repayments or keep the same loan term and make larger and/or more frequent repayments. This will allow you to get out of mortgage debt in less time and/or build equity in your home faster. A mortgage reduction plan can also effectively shorten the time it takes to pay off your mortgage and significantly reduce the total amount of mortgage interest you will pay.
- Money for a lifestyle expense – Borrow more, enjoy it now.
If you have equity in your home, you can increase your current home loan, giving you access to additional funds to pay for a vacation, wedding, education expenses, home improvements, and/or the purchase of a motor vehicle. This option is generally less expensive than accessing money through a credit card or a personal loan with a higher interest rate.
- Investment money – Borrow more, build wealth
Similar to the lifestyle spending benefit, but you access the money to use for investment purposes, such as buying stocks or collectibles, depositing in managed funds, or providing a deposit for an investment property. The interest on the investment portion of the loan may be tax-deductible and, in this case, may result in a reduction in the overall amount of personal taxes payable, effectively increasing your cash flow.
- Reduced loan costs, financial services costs, and interest rate – economy of scale
The larger the loan amount, the more likely you are to receive a lower interest rate and additional benefits such as no origination fees, no ongoing fees, discounts on fixed interest rates, and other financial services (bank account fees, home insurance, credit card fees, financial planning, and investment fees). This can be achieved by combining 2 or more home loans into one larger home loan or a package of loans and often with no or very minimal fees.
- Reduce your total monthly debt payments – Consolidate your debts, improve your cash flow
By combining all debts, i.e. home loans, credit cards, store cards, personal loans, etc. into one home loan, you will effectively reduce the interest rate of the short-term debts to that of the home loan. The monthly repayment on the home loan will be less than the combined monthly repayments on the individual debts, reducing your total monthly expenses and leaving more money in your pocket at the end of the month.
- Cash flow security – control of your money, peace of mind
By converting a variable rate home loan to a fixed-rate home loan, you can protect yourself from the adverse effects of rising interest rates by locking in the interest rate for a set period of time, giving you cash flow management certainty as well as peace of mind and better control of your money.
As you can see, there are many benefits to refinancing a home loan and it is very important to understand how you can take full advantage of them before making a decision.