What’s The Difference Between Fixed Variable And Split Rates
Fixed home loan rates mean the interest rates on your home loan are locked in for a set period. Rate changes will not affect you and your repayments will remain the same during the fixed rate term. Fixed rate home loans provide certainty and stability. However, you may be charged costs if you change any of the terms of the loan, for example, make additional repayments above a permitted limit.
Variable home loan rates can change from time to time. This is great if interest rates go down but your budget would need to cover the possibility of rates going up as well. Variable rate home loans offer greater flexibility because you can make additional repayments and redraw, pay off your loan early or take advantage of an offset account.
As both fixed and variable rate loans have pros and cons, split loans are a way to get the best of both worlds. For example, you could split a $400,000 loan 50/50, with half in an ANZ Fixed Loan and the other half in an ANZ Standard Variable Loan.
You can split your loan into whatever ratio of fixed and variable suits you.
Refinancing To Consolidate Debt
If you have enough equity in your home, you might be able to use built-up equity in your home to pay-out high-interest debt through a mortgage refinance. For example, if you have a number of outstanding debts, such as a car loan, a line of credit, or credit card bills, you may be able to consolidate this debt through the variety of mortgage refinance options available.
How Can I Refinance My Home Loan
Luckily for you, you now live in a world where switching home loans with certain providers can be done almost entirely online and in a timely manner. Youd be hard pressed to find someone who actually enjoys the process of looking at their home loan and applying, its a pain! If youve crunched those numbers and are ready to make the switch, have your documents ready, such as payslips, loan statements, your ID and anything else you might need. If a few years down the track after refinancing you think you can get an even better deal, you might consider refinancing again! When it comes to home loans, lenders need to earn your loyalty.
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How To Decide Whether You Should Refinance
Refinancing a fixed-rate loan isnt a decision that should be made lightly. The most popular reason for refinancing is to get a better deal on your loan, typically through a lower interest rate.
But even if the rate youre chasing is significantly lower than your fixed-rate, you might not be saving money. Break costs are extremely expensive and theyre not even the only fee youll end up paying. Your current lender may also require you to pay a discharge fee, while your new lender may require you to pay application fees.
Before you refinance its vital you weigh up the savings refinancing will afford you, with how much it will cost to break your fixed-term. If the cost to break is greater, you may be better offer sticking out the fixed term.
If youre considering refinancing with us, contact one of our friendly lending specialists on 13 10 90 or book an appointment for a time that suits you.
When Is Refinancing Not Worth It
Its important to remember that refinancing starts your loan term over. That means youre spreading the remaining loan principal and interest repayment over a new 30year or 15year loan term.
This has big implications for the longterm cost of your new loan. As such, refinancing might not be worth it if:
1. You have had your current mortgage for a long time
Homeowners who are a decade or more into their mortgages are less likely to see savings with a small rate decrease, because theyll be extending the full payoff period to 40 years or more and paying interest on all that extra time.
One solution is refinancing into a shorter loan term like a 20 ,15, or 10year mortgage instead of beginning all over again with a new 30year loan.
Shorter terms typically have lower rates. And youll likely save even more in interest because you pay off the loan sooner.
But keep in mind: The shorter your loan term is, the higher your monthly payments will be. So a shorter loan term is not always an affordable option.
In situations where a homeowner is nearly done paying off their home loan, a refinance rarely makes sense.
2. Refinancing would increase your total interest cost
If your new rate is not low enough to generate longterm savings, you could end up paying more interest over the full loan term.
Take a look at an example:
| Yes | No |
The second refinance option dropping the rate by 0.5 percent actually costs this borrower $16,000 more if they keep their loan its full term.
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Types Of Mortgage Refinancing
The three most common types of mortgage refinance options are: rate-and-term refinance, cash-out refinance and cash-in refinance.
The rate-and-term refinance allows homeowners to lower their interest rate and/or change the term, which is the length of time borrowers must pay on their loan. For example, you might want to refinance your 30-year mortgage with a 3.5% interest rate into a 15-year mortgage with a 3% rate. This will help you lower the amount you pay in interest and pay off the mortgage faster.
A cash-out refinance gives homeowners the opportunity to access the equity in their home, with the option to also lower their interest rate.
A cash-in refinance is when homeowners apply cash to the principal, which can help them lower their loan balance, eliminate private mortgage insurance, get a better interest rate or qualify for a refinance.
Refinancing To Access Your Homes Equity
In the first quarter of 2020, 42% of all refis involved an increased principal balance by at least 5%, indicating the owners took cash out, financed closing costs or both. While cash-out refi rates can be a bit higher than rate-and-term refinance rates, there still may be no cheaper way to borrow money.
You can access your home equity through a cash-out refinance if you will have at least 20% equity remaining after the transaction. Heres an example.
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Ways To Make Your Monthly Payments More Affordable
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When you take out a home equity line of credit there is an initial draw period, which typically lasts 10 years. During this time you can borrow money from the credit loan as needed and make low, interest-only payments on what you’ve borrowed. Many homeowners do just that.
After the draw period ends, however, you can no longer borrow from your HELOC and instead must begin making fully amortized interest and principal payments each month. This second stage is known as the repayment period, which is usually 20 years. That means your monthly payments can be significantly higher than they were during the draw period, and many homeowners end up facing payment shock.
One way to solve the payment-shock problem is by refinancing your HELOC, and there are several ways to do it. In this article, we explain how to qualify, what your options are, and the pros and cons of each of those options.
Closing Costs: The Other Expense For Home Buyers
Interest rates, loan terms, and extra taxes and fees influence your mortgage for the life of your loan. But borrowers have to deal with closing costs before finalizing a new purchase or refinance.
Closing costs include a lenders origination fee and home appraisal fee. They also include attorneys fees for title searches and deed transfers.
Discount points which can provide a lower interest rate will also be due at the closing table. VA loans require a VA funding fee at closing.
All in all, its not uncommon to pay 2 to 5 percent of the loans value in closing costs. For a $200,000 loan, 5 percent adds up to $10,000.
Sometimes you can negotiate with the homes seller to pay closing costs, especially if the seller is especially motivated to close the deal. Some loan options allow you to finance some or all of the costs.
No matter what type of mortgage and loan term youre considering, youll also need to be prepared to cover closing costs.
Tim Lucas
Editor
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Will Current Mortgage Rates Last
As the new Omicron variant causes a new surge of the virus, uncertainty around the economic recovery is putting downward pressure on rates. With a little over a week left in the year, expect mortgage rates to remain near historic lows. Looking into next year, however, all signs are pointing to increasing rates.
Next year, the Federal Reserve expects to tighten monetary policy sooner than previously thought. Last week, the central bank announced that it expects to end its bond purchasing program by spring 2022 and raise the federal funds rate three times next year. Both of these moves will put upward pressure on mortgage rates.
On Thursday, the yield on the 10-year Treasury note opened at 1.457%, just 0.001 percentage points lower than Wednesday’s close of 1.458%. There tends to be a spread of about 1.8 percentage points between the 10-year Treasury and average mortgage rates.
How Do I Compare Fixed Rate Loans
To find a good fixed rate product that may suit your needs, consider the following five important questions.
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Mortgage Rates: What The Experts Are Saying
With mortgage rates so low, most experts agree the only direction to go is up. The question now: how fast will it happen?
Experts have been saying all year that mortgage rates will continue ticking upwards through the end of 2021. News of the Omicron COVID-19 variant has created fresh economic uncertainty and is putting upward pressure on rates. At the same time, rates are getting downward pressure due to the highest inflation in nearly 40 years. The result is volatility. For example, since November 10th, rates have followed this up and down pattern each week: 3.15% 3.22% 3.24% 3.2% 3.24% and most recently 3.28%.
While experts still expect rates to increase as the economy recovers, the recent volatility could continue through the end of the year and into 2022. Most experts believe increases would be incremental. Were not expecting an overnight shoot up where all of a sudden mortgage rates are at 3.5% or 4%, says Ali Wolf, chief economist at Zonda, a California-based housing data and consultancy firm.
Despite the ups and downs, todays mortgage rates are still close to 1% lower than pre-pandemic levels. So, if you are in the market to refinance or purchase a home, now is a good time to take action. Here is everything you need to know about scoring the best rate and how much it can save you.
How Old Will You Be When The Mortgage Is Repaid In Full
One downside to refinancing is that if you sign up for a new 30-year mortgage, youre restarting the clock until youre mortgage free. If youre already seven years into a 30-year loan, you may not want to start over again with 30 years to go. This is especially true if the new timeline would mean youre carrying debt into your 60s when youre likely going to be thinking about retiring.
Its possible you could pay more than the monthly minimum to shave time off the repayment term, but this should be a consideration as well. Alternatively, you can refinance to a 15-year mortgage.
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You Think Interest Rates Are On The Decline
Your fixed-rate loan saves you money when interest rates are on the rise, but it doesnt let you take advantage of declining rates. But an ARM can. As long as the rate goes down when its time for your loan to adjust, so might your payment.
Keep in mind:
It can be very hard to predict what future interest rates will be, so this shouldnt be a primary reason for refinancing into an ARM.
What Are The Alternatives To Refinancing Your Home
Rather than refinancing their home in whole, some homeowners who have built up significant equity & currently enjoy a low-rate loan can use a home equity loan or line of credit to tap their equity without resetting the rate on the remainder of their existing debt. A home equity loan is a second mortgage which operates similarly to the first mortgage, but usually charges a slightly higher rate. A home equity line of credit operates more like a credit card, as a revolving form of debt which can be drawn upon & paid off as convenient.
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Should I Break My Fixed Rate Mortgage Now What Will It Cost Me
With rates these days at historical lows, you may be wondering if it is the right time to break your current mortgage and lock into a new term to take advantage of these low interest rates.
However, remember that if you have a closed mortgage, you will incur what is called a pre-payment charge.
Lenders incur significant sales, underwriting and funding costs to issue and renew mortgages. Mortgage rates are designed to recoup these costs over the contractual mortgage term.
Most of today’s mortgages are ‘closed’ which, for similar terms, tend to have lower rates than open mortgages. The lower rates are in large part due to the fact that there are prepayment charges which are designed to compensate the lender for the economic costs it incurs when a prepayment amount exceeds the prepayment privileges permitted under the mortgage. These costs include prepayment transaction costs, plus the fact the lender will not receive the full term amount of interest that was designed, in part, to recover the lenderâs costs to acquire the mortgage.
In contrast, you can pay off an open mortgage at any time without penalty. However, rates tend to be higher than for closed mortgages with similar terms.
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