Everything you need to know about Refinance Rates
The interest rate you are offered as a new home loan customer may differ significantly from the rate you are offered when you refinance. After several years of paying off your current loan, you may be in a better financial position to obtain a more competitive rate and home loan product.
So, when mortgage rates move, borrowers may begin to crunch the numbers to determine whether refinancing makes sense. Nevertheless, if you try and and manage the best refinance rates, you could refinance your loan and save money in the long run by aligning the product with your personal finance strategy. This could help you own your property a lot sooner with a better rate and cash flow management and potentially a lower interest rate. Luckily, there are numerous things you can do to assist in making this happen.
However, there are some common pitfalls that borrowers looking to refinance can easily fall into if they are only concerned with refinance rates.
BEWARE: Borrowers are often lured into thinking that a Cashback, Rebate and such short term incentives will help them get ahead. However, it may be costing you a lot more in the long term. Borrower First has seen a significant increase in such requests and agrees with much of the industry that this is misleading and deceptive behaviour.
What are Refinancing Rates?
When a borrower refinances a home loan, he or she gets a new lender to pay out the existing loan to the current lender, sometimes a refinance could be with the same lender, but on new terms. This is uncommon as the person processing the application may not get paid by the lender. You can either do an internal refinance and switch products or restructure with your current funder, or you can do an external refinance and switch lenders entirely.
Another term for the mortgage rate offered on a home loan used for refinancing is a refinance rate. It is similar to a standard mortgage rate in that it is calculated on the amount owed. However, for customers looking to make the switch, home loan refinance rates are frequently more competitive.
Here are a few ways to derive the best refinance rates
This may sound counter intuitive, but stop shopping around and get a refinance expert. Some of the best in the business will admit, they need to workshop to find the best current deal after a few decades of applying for home loans, trying to DIY Finance will set you back.
It’s better to admit that you don’t know what you don’t know, than to pay for the lack of humility. More importantly, be mindful of how the expert helping you with your refinance gets paid. If all they ever earn is commissions, they are no different to the employee who earns a salary from the lender. How open are they going to be to providing better refinance rates or options that do not pay a commission?
Trying to do too many things at once is never a good idea, keep it simple by listing your priorities in order. This is one way to stay clear of gimmicks and short term incentives such as rebates and cashbacks.
The three factors that influence an application for a finance facility are, your borrowing capacity, security and credit worthiness. The first requires you to have a daily good grip on your present income and expenses as lenders will only lend based on your disposable income. It may be a tiresome exercise but worth it, for you cannot change what you don’t measure and the devil is in the detail. A personal finance strategy will help here. It will also help with your security.
Security is the difference between the value of what you want to buy less the loan amount. In technical terms it is called loan to value ratio (LVR). For example, say you want to buy a $100,000 property and you need to borrow only $80,000 as you have the balance of funds to pay for everything else, you have an 80% LVR. As the LVR decreases more options and better deals start to appear. This is key to refinancing.
Last but as important is your credit worthiness, this is normally referred to as your credit score or credit file. In the last few years we have moved to a comprehensive credit reporting system, allowing credit managers who approve finance applications to review your monthly ability to repay your current credit facilities. If in the last you have has to go to a lender due to poor credit, a refinance could be the way to go for a better product if there has been a signifcant improvement.
Your credit utilization ratio measures how much credit you’re using in comparison to how much credit you have available. Lowering your credit utilisation ratio before applying for a refinance loan may allow you to qualify for lower interest rates or the best refinance rates. Aim for a target ratio of 30% or less.
Debt repayment will naturally reduce your credit utilisation. However, you can request an increase in your credit limit from your card issuer, which will help lower your credit utilisation ratio.
Another factor that your lender may consider during the refinance process is your debt-to-income ratio or DTI. This figure is expressed as a percentage and shows the amount of monthly income that goes toward debt payments. A lower DTI can help you qualify for a better refinance rate or compensate for a lower credit score.
Some refinance loans, such as cash-out refinances, allow you to borrow more than your current mortgage balance and pocket the difference. However, because you’re increasing your loan-to-value ratio, this usually results in a higher interest rate (LTV) – An LTV ratio compares the amount of equity in your home to the amount owed on your mortgage.
Refinancing to a 30yr loan term can see you paying back more over time.
Consider reducing your term if you have the capacity or even moving from Interest only repayment to principal and interest repayments as lenders will often have a better refinance rate.
However, because you are repaying the loan in a shorter period of time, your payments will rise. Make sure you can handle the higher payments before refinancing into a shorter loan term.
THere are heaps of things to consider apart from the above and we see to all of these in our one to one.
Bonus tips to get the best refinance rates
Pay all of your bills on time – Pay all of your bills on time by setting up reminders or automatic payments.
Pay off some or all of your debt – If you need to supplement your income, consider picking up a side job.
Don’t close any credit cards – This will help you keep your credit history intact.
Avoid hard inquiries – Avoid applying for credit before refinancing your home. Applying for new credit can result in a tough inquiry, which can lower your credit score.
Find reasonable home loan refinance rates with Borrower First
We at Borrower First believe that there is a better way to refinance than a purely commission-based model, and we work hard to demonstrate this by obtaining the best refinance rates for you (and not the lender). We save you more than just your money; we also save you the stress and time it would take to negotiate a good deal. We understand what you don’t know, and we’ll make sure you know everything there is to know about money management by the end of our conversation.
Get in touch with us to understand more about refinance rates.