Should You Refinance Your Mortgage Loan?
If you’re thinking about refinancing your home loan, the amount of equity you have built up in your home is the most important qualifying factor. Equity is the difference between the amount you owe towards the principal portion of your mortgage and the current appraised value of your property. You can also think of equity as the percentage of the home that you own and not the bank.
Using Home Equity to Your Advantage to Refinance for a More Favourable Rate
The more equity you have, the less risk the lender takes when refinancing your mortgage. It’s similar to making a down payment when you first buy a house. The greater the down payment, the less the lender has to finance. When you think of equity in these terms, it’s easy to see things from the lender’s perspective.
While the most common reason for drawing on the equity in a home is to reduce the monthly mortgage payment and interest paid, you can apply for a cash loan instead. Some Australians do this to invest in rental property or make upgrades to their home that increases its value. You may qualify for a lump sum loan payout, a home equity line of credit, or both. However, the amount you can borrow is often dictated by the equity in your home.
Before you complete an application to refinance mortgage loans, make sure that you understand all fees associated with the transaction. For example, the stamp fee alone can be up to five percent of the value of your loan. You can then compare what you would pay against what you would save to make your decision.
How Much Equity Should You Have When Applying for Refinancing?
Most lenders will not approve a loan for greater than 95 percent loan-to-value ratio. This means you must own at least five percent of your home. However, this figure is typically 20 percent for home refinancing loans. It can be extremely difficult to gain approval for a home refinancing loan when your loan-to-value ratio is greater than 80 percent. One possible exception to this rule is having someone co-sign on the loan as a guarantor.
Another option to apply for a home refinancing loan with not enough equity is to work with a specialty lender. Some are willing to accept applications from people in this situation, although you should expect to pay a higher interest rate than someone with more equity.