If you’ve noticed that the interest rate your bank is charging is not as good as another home loan you’ve seen advertised, or you simply want to check if you can save money on your home loan to make your day to day cashflow healthier, then you can investigate your options at any time.
Let’s start with a quick explanation of what equity is.
Equity is the amount of money you would have left over in your bank account if you were to sell your home today, after covering selling costs and paying the bank back what you owe on your home loan. It has nothing to do with what you paid for it originally, just the difference between what you owe and the present value, minus the costs of selling it.
So, for example, if your home is mortgaged and you owed the bank $350,000 for it, but it sold for $450,000, then your equity would be $100,000 minus the total selling costs. Don’t forget to calculate the selling costs before you celebrate, think real estate agent fees + marketing costs + lender fees + any other settlement costs including conveyancing services.
It’s always a good idea to know your current financial position with your home loan, knowing roughly what you’d be left with if you had to sell up.
What is your home worth now?
Not sure what your property is worth in today's market? You can get a quick estimate from your real estate agent in an appraisal, or do your own research to gauge the market (or present) value of your home to get an idea of what your sale might look like if you were to sell your home in the current real estate market. Don’t guess it on your own, unless you have reliable evidence to support it because people tend to overestimate the worth of their home and can be surprised or disappointed unnecessarily.
So, how much equity do I need to have before it’s worth refinancing?
Well, the answer is that’s completely up to you. But I would advise you to have at least 20% equity in your home to avoid having to pay Lenders Mortgage Insurance (LMI) on the new loan. In some cases, LMI is very expensive, so it's a cost worth considering and eliminating if you can.
Please speak with your mortgage broker to see if they can find other home loans on your behalf before you have an extra credit check added to your financial history.
We’ve got less than 20% equity, how can I increase my equity?
The best ways you to bump up your equity value is by paying a little bit more off your home loan over time, or making some home improvements to grow the value of your home over time, so that when you get to that 20% plus equity position you could comfortable look at refinancing without the extra LMI cost involved.
The exception to waiting until you have more than 20% equity is where a home was purchased through a state government lender first home initiative. The interest rate on those products is usually higher than the mainstream lenders, so while the equity value might not have grown to 20% yet, it could still be worth moving to a traditional lender’s home loan product and wearing the cost of the LMI because of the saving on interest over time. It’s a situation I can provide you with information on and help you weigh up your options.
If you'd like help with assessing your personal and financial situation, as well as comparing the loans in the market to see if you're truly getting the right deal for you, then call Bob Malpass now on 0431 862 136, email [email protected] or send us a message via our website for a quick response.
Thanks for reading,