20 Things You Wish You Knew When Refinancing
You have read some blogs, done some research online and are keen on refinancing, as you now know that refinancing is pretty low hanging fruit, in financial terms.
However, there are hundreds of options out there and truth be told, you have no idea where to start!
Let’s start by lifting the lid on the industry jargon:
- Principal. Principal is the amount of money you borrow from the bank. As you pay off the principal, you will create more equity in your home.
- Interest. Interest is calculated on the principal amount outstanding on your loan. Many people refinance their home loan to secure a more competitive interest rate.
- Interest Rate. The interest rate on your home loan will determine how much interest is charged. There are a huge number of variables that affect the interest rate of a home loan.
- Variable Rate. When you have a variable rate home loan, the interest rate of your mortgage will fluctuate in line with market movements. Variable rates provide a lot of flexibility for the borrower.
- Fixed-Rate. Fixed-rate home loans lock in the interest rate for a predetermined period of time, typically from one to five years. Fixed rates provide a lot of certainty for the borrower.
- Split Loan. A split home loan will be partly fixed and part variable. Perfect for those who would like the certainty of a fixed rate and the flexibility of a variable rate.
- Principal and Interest Repayments. When you make principal and interest repayments, your regular repayment will contain an element of principal and an element of interest. This means you are chipping away at the loan with every single repayment.
- Interest Only Repayments. When you make interest-only repayments, you pay only the interest costs each month, and no principal. This is great for cash flow, however, you are not reducing the loan amount when you make interest-only repayments.
- Repayment Frequency. Depending on the type of loan and the lender, principal and interest loans can oftentimes nominate weekly, fortnightly or monthly repayments. Interest-only repayments can only be made monthly.
- Owner Occupied Loans. This is the term used when the property used as security for your home loan is actually your home. These days, owner-occupiers can typically secure more competitive interest rates than investors.
- Investment Loans. This is the term used when the property used as security for your home loan is an investment property. These days, investment loans are more expensive than owner-occupied loans.
- Security. The asset that is being used to secure the home loan. Every home loan needs an asset linked to it, and typically this is property.
- Equity. The difference between what your home is worth and how much you currently owe on it. There are 2 ways to gain equity in your home, either through paying the principal amount down or having the property increase in value.
- Loan Term. The length of time you have to pay the loan off. A 30-year loan term is standard.
- Offset. An offset account is just like a regular transaction account that is linked to your mortgage to reduce the amount of interest you pay. A great idea, as for every dollar you keep in an offset account, you will pay no interest on the equivalent amount on your home loan.
- Redraw. A redraw facility will ensure you have access to any additional funds you contribute towards the mortgage. Great idea for a rainy day fund or to save for lifestyle goals.
- Settlement. Settlement of a refinance is when the original loan and lender is paid out in full, and the new lender lends you the money to do. From this day forward, repayments will be made to the new lender.
- Loan to Value Ratio. More commonly known as LVR, the loan to value ratio describes the amount owing on the home loan compared to the value of the property. For instance, an $800,000 home loan on a $1,000,000 property will have a loan to value ratio of 80%.
- Lenders Mortgage Insurance. More commonly known as LMI, lenders mortgage insurance is a premium that is charged to borrowers when the LVR of a loan is above 80%. Remember, this insurance protects the lender, not the borrower.
- Refinance. When a borrower decides to switch from one lender to another, essentially have the new lender pay the old loan out with the original lender, and creating a new loan. Borrowers typically refinance to get a more competitive rate, secure better features or release equity for investment and lifestyle purposes.
What a list!
Hopefully, this has shone a light on some of the more common terms you will come across when refinancing and made you more confident to work towards your financial and lifestyle goals.
Best of luck!
PS – if you want any tips on refinancing, shoot me through an email! [email protected]