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What is Mortgage Refinancing & When is it Appropriate?

As one of the most expensive debts you are ever likely to have, mortgages can dominate a person's financial life. However, there are options you can take to reduce your mortgage burden. If you are on your first mortgage the chances are that you are not receiving the best interest deal possible. One possible solution is mortgage refinancing. Here are 5 steps that might assist you with lightening your mortgage burden.

Banks often rely on your apathy

Applying interest to loans is one of the ways in which banks make most of their money. As banks and other traditional lenders have a monopoly on the mortgage market they do not offer the most competitive interest rates. Through changing to a mortgage with a more competitive interest rate it possible to save up to $100,000, an example of this is offered further down the page. Paying excess interest is essentially dead money and is ultimately only contributing to the wealth of the banks. If you are dissatisfied with your current mortgage, refinancing could be a beneficial option for you to explore.

Find out your total mortgage liability

As simple as this concept may sound it is also vitally important for the proper management of your mortgage. The great majority of people have no idea how much they will pay on their mortgage during the life of the facility. On a mortgage of $200,000, over 30 years, charging 7.25% and paid monthly, you will pay approximately $490,000 over the term of the mortgage.

This means that your total interest component is $290,000. This is more than double the value of the mortgage itself.

Taking this scenario into account we can look at the potential benefits of refinancing. If you refinance and your interest liability increases, then don't refinance, if the interest decreases then it is definitely a possibility you should investigate. Even if it reduces your mortgage interest by 0.5%, you will be reducing the total liability of your mortgage by $23,000.

Are there lower interest rate mortgages available?

It is easy to acknowledge that a lower interest rate would be beneficial to you but it is harder to actually find a mortgage with a lower interest rate, however they are available. If you are a first time buyer or have held your mortgage for some time then it is likely you are paying a high interest rate on your mortgage. Look at the table below to see how much money you can save simply by finding a lower rate:

Interest Rate 7.25% 6.75% 6.25% 5.75%
Interest Liability (approx) $290,000 $267,000 $243,000 $220,000
Savings - $23,000 (8%) $47,000 (16%) $70,000 (24%)
*Figures are based on $200,000 mortgage at 7.25%, over 30 years, paid monthly.

You can make massive savings just on the interest rate. If you find a mortgage 2% lower you can save almost a quarter of the interest you were going to pay. $70,000 is a lot of money but you can save more if you increase the amount of your monthly repayments.

Can you commit extra funds to your mortgage?

Many people refinance their mortgage just to gain a lower interest rate. However, if you are currently committed to a mortgage which does not allow you to contribute extra funds to your mortgage then refinancing to a mortgage that does allow you to can be very beneficial. The table below demonstrates the savings you can make by contributing extra money to your mortgage each month.

Extra per month $50 $100 $250 $500
Interest Saved (approx) $38,500 $67,000 $121,000 $167,500
Time taken off mortgage 3 yrs 4mths 5 yrs 10mths 10yrs 10mths 15yrs 6mths
*Figures are based on $200,000 mortgage at 7.25%, over 30 years, paid monthly.

These figures are relating specifically to a 7.25% interest rate, so combined with a lowered interest rate these savings could be even greater. If you are able to pay $500 more per month on your mortgage then you can halve the time in which your mortgage is paid and halve your interest liability.

Consolidate your personal debt into your mortgage

Another of the benefits of refinancing is the ability to consolidate your other existing personal debts into your mortgage. This enables you to control your finances more effectively and can offer you significantly lower interest rates on these debts. As an example of the benefits of debt consolidation, imagine that you have $5,000 of personal debt which is costing you approximately $100 per month to service. Using the table above, if you spent that $100 on your mortgage then you could save $67,000 over the course of your mortgage. This gives you two options, pay off your $5,000 now so you can make your savings immediately or you can consolidate your personal debt into your mortgage. That extra $5,000 translates to an extra $35 per week onto your mortgage, but if you endeavour to find a lower rate or pay extra the additional cost will be wiped out within months.

Mortgage refinancing is a beneficial method of reducing the burden of your mortgage. However it is always important to ensure that refinancing is actually beneficial to you.

If you would like to find out if mortgage refinancing is the most efficient way to become debt free then fill in the following form or call Debt Relief on 1300 781 034 and our staff will assist you.

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