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How does refinancing a home loan work?

Refinance Your Mortgage

When you hear ‘home loan refinancing,’ you might picture an awful maze of financial decisions. Yet, it’s about aligning your mortgage with your current financial goals and saving money. This blog aims to simplify the concept, breaking down the ‘what’ and ‘why’ of switching up your home loan.


We’ll cover the benefits, the when, and the how, all without the complex jargon. Whether you’re looking to adjust your budget, cut down on costs, or just curious about the process, we’re here to unfold the steps and considerations that could streamline your monthly expenses and bring your financial aspirations within reach.

What does home loan refinance mean?

Home loan refinancing is replacing an existing mortgage with a new one, which can provide benefits such as a lower interest rate, different loan terms, or access to equity. 


In Australia, the trend for refinancing has been on the rise, with the value of home loan refinancing jumping 13.8% in the financial year 2023, according to new research from PEXA. 


This data highlights the growing inclination of Australian homeowners to renegotiate their mortgage terms, often seeking more favourable rates in response to economic shifts, including the rising cash rate targets by the Reserve Bank of Australia.

Why would I choose to refinance?

Refinancing your home loan can be a smart financial move for several reasons. It can help you snag a better interest rate, which might lower your monthly payments. If you have other debts like credit card balances, you can roll them into your home loan, where the interest rate is usually lower, saving you money on interest charges. 


Plus, if your home has increased, you can tap into that extra equity and get some cash-out. This could be useful for significant expenses like home renovations. The amount you can borrow when you refinance will depend on how much your home is worth now, your credit score, and how much you earn. In short, refinancing could simplify your finances by combining several debts into one easy payment.

How often should I refinance my home loan?

Refinancing your home loan can be considered annually to ensure your loan’s terms remain competitive with market changes. It’s wise to review when interest rates drop, your financial situation changes, or at the end of a fixed-term loan. However, weigh the costs of refinancing against potential savings. 

Refinance if it financially makes sense, keeping in mind credit requirements and any impact on your credit score. There’s no set frequency, but it’s crucial to ensure the benefits outweigh the costs each time you consider refinancing.

Refinance your Home Loan In 6 Simple Steps

Refinancing your home loan can be a strategic financial decision, allowing you to take advantage of better interest rates, consolidate debt, or adjust your mortgage term to suit your current circumstances. Here’s a step-by-step breakdown of how to refinance your home loan.

Step 1: Assessing Your Refinancing Goals

The first step in refinancing is to define why you want to refinance clearly. Your goal could be to reduce your monthly payments, shorten your loan term, tap into your home’s equity for significant expenses, or switch from an adjustable-rate to a fixed-rate loan. Each goal will dictate a different approach to the refinancing process.

Step 2: Financial Health Check-Up

Before qualifying for refinancing, lenders will examine your credit score, income, debt-to-income ratio, and employment history. It’s essential to review your credit report for any errors that might affect your score negatively. If your credit score has improved since you took out your original mortgage, you will likely qualify for better terms.

Step 3: Understanding Home Equity

Your home equity plays a significant role in refinancing. It’s the portion of your property that you truly “own.” If you have at least 20% equity in your home, you’re in a good position to refinance without the need for private mortgage insurance (PMI). However, if your equity is less than 20%, lenders might require PMI, which will add to the cost of your new loan.

Step 4: Researching and Comparing Loan Offers

With your refinancing goals and financial status in hand, it’s time to shop around for the best loan offers. Interest rates, loan terms, and fees can vary widely between lenders, making it crucial to compare your options thoroughly. 

The FinFix Broker Group Online Loan Compare tool is an excellent resource, offering the latest rates from over 50+ lenders. This comparison tool empowers you to evaluate different loans’ rates and features, helping you find the perfect fit for your refinancing needs.

Step 5: Applying for the New Loan

Once you’ve chosen a lender for refinancing, you must complete a loan application. This will require documentation such as recent pay stubs, tax returns, bank statements, and assets and debts. the next crucial step is to complete a comprehensive loan application. 

This process requires you to meticulously gather and submit vital financial documents, including your most recent pay stubs, tax returns from the past two years, and bank statements for the last 60-90 days. Additionally, you must provide a detailed list of your current assets and outstanding debts. 

Ready yourself for an in-depth financial review by the lender, who will inspect your credit history, confirm your employment status, and evaluate your financial well-being to decide if you qualify for the loan.

Step 6: Home Appraisal

Most lenders will require a home appraisal to determine the current value of your property. The appraised value is crucial because it determines the loan-to-value ratio (LTV), a critical factor in loan approval and terms.

Step 7: Loan Approval and Closing

If the lender is satisfied with your application and the appraisal, they will approve the loan. You’ll then receive a closing disclosure that outlines the terms of your new loan, including the interest rate, closing costs, and the amount of your monthly payments.

Step 8: Closing Your Old Loan

Your new lender will work with your current lender to pay off your existing mortgage. You’ll need to complete a discharge form to release the current mortgage. You may be responsible for paying a prepayment penalty if your original loan terms included one.

Step 9: Starting Your New Loan

With the old loan paid off, you’ll start making payments on your new mortgage. Review the payment schedule and understand how to make payments to avoid late fees.

Tips for a Smooth Refinancing

  • Cost-Benefit Analysis: Calculate the break-even point at which the savings from your new loan exceed the refinancing costs. This will help you determine whether refinancing is worth it.
  • Read the Fine Print: Understand all the terms and conditions of your new loan. Pay special attention to any fees or penalties.
  • Stay Responsive: Be available to your lender during the refinancing process. Prompt responses to requests for additional information can help avoid delays.
  • Consider Timing: Refinancing makes the most sense early in your mortgage term when the majority of your monthly payments are going toward interest rather than principal.

Wrap up!

Refinancing your home loan is a practical choice for many homeowners looking to improve their financial health, and this blog has aimed to simplify the concept for you. 

If you’re considering this financial move and seeking assistance, we at Finfix Brokers Group are here. Our team in Melbourne specialises in making refinancing clear and straightforward. We provide professional advice and customised solutions, ensuring your refinancing process is as smooth and beneficial as possible. 

With our support, you can confidently secure a home loan that meets your needs today and sets you up for a better tomorrow. Contact us to learn more about how we can assist you.



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