You may have heard that refinancing your home loan to a cheaper rate can help you pay off your mortgage sooner. This can be true but there are certain steps you need to follow to make sure this is the case.
The following tips will help you refinance in a way that shortens your loan and leaves you debt free as soon as possible.
Always refinance to the same or shorter loan term
Some first time refinancers may fall for the trap of switching their loan to a longer loan term than they are currently on. While this will reduce their monthly repayment size, it will also increase the amount of interest they pay over the life of their loan.
To avoid this, the first thing you should do is to establish how much of your current loan term is remaining. You can do this by contacting your existing lender to determine how many years are left on your mortgage. Once you know how long is left on your loan, it is important to make sure you do not refinance to a longer period.
You can discuss this with a potential lender when you have your initial phone chat. Let them know how many years are left on your loan and make sure they are aware that you don’t want to extend this time period.
Low rate refinancing home loans
Use lower repayments to get ahead
If you are refinancing to a lower interest rate your monthly repayment size will be reduced. To figure out how much cash you will be freeing up each month you can use a mortgage calculator.
With this extra cash freed up each month you have the opportunity to shorten the life of your home loan. If, instead of pocketing the cash, you continue to make the same size repayments you could potentially knock years and thousands of dollars off your home loan.
Example – Kelly switches loans
Kelly has 25 years left on her mortgage and refinances her $300,000 loan to one with a lower interest rate. She ends up saving around $100 a month on mortgage repayments. She wants to work out if putting this money back into her mortgage is worth it in the long run.
Kelly calculates that by keeping her repayment amount steady on her $300,000 loan she will save close to $20,000 in interest and knock over two years off the loan term with her new loan. She decides that this is a good strategy to adopt as she wants to be debt free as soon as possible.
Take advantage of flexibility and features
Another way that you can use refinancing to shorten your mortgage term is by refinancing to a loan that offers flexible repayment options. For example, if your current loan does not allow you to make weekly or fortnightly payments you are missing out on an opportunity to use more frequent repayments as a way of reducing the length of your loan.
Similarly, if your current loan doesn’t allow you to make extra repayments whenever you wish, you could be missing out on an opportunity to pay off you loan quicker. By putting bonuses, inheritances and gifts as lump sums towards your mortgage you will be paying down the principal amount faster meaning you have to pay less interest in the long run.