When you first buy a home, the requirement to refinance is not usually on your mind. As time goes by, life changes such as promotion in your job, loss of a job, the birth of children, marriage, divorce or retirement can each cause you to reconsider your financial arrangements.
In thinking about refinancing your home, the major consideration is the reason why you are looking at refinancing, and whether this is a valid and logical reason for changing your current arrangements. Whether it is a change in your life circumstances, an attractive investment that requires funding, a desire for extra cash or simply that you have seen a better offer from a different financial institution, there are some points worth thinking over before you make the change to make sure you understand what you may gain or lose.
Possible benefits from refinancing include a lower interest rate, a shorter or longer repayment schedule or having a more flexible loan such as one where you can pay extra money into the loan and have access to redraw it if you need to. Rolling other debts into your mortgage is another potential benefit as mortgage interest rates are generally lower than those on personal loans and credit cards. This can be a great benefit as long as you resist the temptation to run up further debts outside of the mortgage.
There are also a number of possible drawbacks in refinancing your loan. Given that it will take time, money and effort to arrange the change, there needs to be more advantages than disadvantages associated with the new loan. While many financial institutions may offer tempting “honeymoon” interest rates you need to check the fine print carefully to ensure that the other aspects of the loan meet your needs. Question whether you will be able to afford the repayments once the interest rate goes up as well as any other conditions that may affect you such as the cost of settling the loan early should you sell the house or decide to change financial institution.
If you are looking at borrowing money privately from friends or family, consider the potential impact on your relationships should you be unable to pay at any point or if they should require their money back at an earlier time than that agreed upon. Other forms of financing such as that offered by private investors should be carefully investigated to ensure that there are no conditions attached that could affect you in a negative way.
In choosing a financial institution it is worth looking past the advertising and cheap rates. Doing some research on a couple of institutions is a wise idea in order to find out if their current customers are happy with their product and service. You can easily get an idea of how an organisation is perceived by just doing an Internet search. Asking family, friends and colleagues which financial institution they use and whether they are happy with them can also give you an idea of the best ones to be involved with.
Having thought about why you wish to refinance and looked at the possible options and their benefits and drawbacks, depending on what you find, you can either go ahead and refinance, or stay with your current provider if it makes more sense. In either case, having done your homework you can have confidence that you are making a good decision.