Can I pay off personal loans by refinancing a home mortgage?
One of the biggest expenditures in life can be buying a home. There’s a combined sense of accomplishment and relief when you finally get on the property ladder and begin paying off your mortgage. As the years go on, however, life gets in the way, and there are times when your mortgage repayments are not the only loans you’ll have to pay.
Whether it’s a small loan for home refurbishments, credit card debt to pay for your child’s tuition or a loan to pay for a new car, multiple bills are a common occurrence for many of us, but they can get overwhelming.
So what if you could have multiple loans in one place? Refinancing a home mortgage can provide the opportunity to consolidate your debt and pay off personal loans. While it can be a good option, there are a few things to consider before making a final decision. We break down the what, why and how of refinancing and all the important things you need to know below.
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What is refinancing?
Refinancing is the process of taking out a new mortgage to repay an existing loan on different terms. Different terms can include things such as interest rates, length of loan and more.
While this can be carried out with the same lender, it is also common to change to a different provider. Although lots of people carry out research online, speaking to a home loan finance company can really help you decide what option is best for you. The process tends to be a lot less tedious than when applying for an initial home loan, and once you’ve been approved, your loan provider will handle the majority of your affairs for you.
Why would you refinance?
Depending on how much of your mortgage you have paid off and how healthy your credit rating is, refinancing may be the easiest and cheapest way to pay off personal loans. It’s often a smart way to manage your money, especially if you’ve had a change in personal circumstances. Perhaps your credit rating is better now than it was when you applied for your original mortgage, maybe you are more aware of the market now and want to secure a better deal, or maybe you just want to release equity. Whatever the case may be, refinancing can be a great way to have the majority of your debt all in one place.
How do I do it?
If using the same lender, this is often known as a ‘loan transfer’, when opting for a different lender, this is called ‘refinancing’. A lender such as a home loan finance company in Essendon will be able to look at your personal situation and assess your eligibility. This includes enquiring why you want to refinance in the first place, any potential risks and benefits, and establishing your financial situation. They can also outline what’s involved in the process, flag any additional costs and be on call to assist you with each step.
Different types of refinancing options
When refinancing, you generally want to increase, decrease, or keep the loan amount the same. Decreasing the loan amount may reduce your loan term, lessen your monthly repayments and in turn, secure a lower interest rate. If keeping the loan the same, however, you may be looking for different loan terms such as fixed interest rates. But if you’re wanting to refinance a home mortgage to pay off personal loans, then a loan increase is probably the best option.
Loan increases may be used to consolidate more debts or release capital for other expenditures, such as paying off a credit card. Home loan rates are often lower than those for credit cards, so putting your debts into one loan can be a frugal idea. It makes repayments much more straightforward and reduces the interest owing each month.
Research any hidden fees
Like any loan application, there can be hidden costs to take into account before you apply. Using a home loan finance company in Essendon is a great way to make sure you are fully aware of any unexpected charges that may be involved, so you can avoid any potential surprises down the road. Some costs that you may need to factor in include:
- Application fees
- Switching fees
- Discharge/Termination fees
- Stamp Duty
- Lenders mortgage insurance (LMI)
Establish your equity and credit score
Part of the assessment process with your lender is having to establish whether you are, in fact, eligible for refinancing. A massive part of this is your equity and credit score. Having at least 20% equity in your home puts you in a good position to negotiate a better deal with your lender. An improved credit score shows you have a good track record for borrowing, and will also strengthen your case when enquiring about refinancing when home value decreases.
Enquire about Lenders Mortgage Insurance (LMI)
If you have less than 20% equity in your home, you may be liable to pay Lenders Mortgage Insurance (LMI). Often surprise costs like this may negate the purpose of refinancing in the first place. It’s best practice to establish your financial situation as soon as possible so you can make an informed decision on what the best choice is for you.
If you’re looking for a home loan finance company in Essendon and need help with refinancing a home mortgage, speak to the team at Mortgage Choice Essendon today.