Thursday, December 1, 2011

Think before refinancing -1-

There's no such thing as free money

There are 3 main reasons for refinancing:
  1. To free up equity – essentially borrowing more against the value of your house to give you a cash lump sum
  2. To improve your cash flow – reducing your minimum repayments to free up cash on an on-going basis
  3. To get a better deal which allows you to pay off your loan quicker
As a rule most lenders will push reasons 1 and 2 promoting the quick and ‘easy’ short term gain of extra cash. However, short-term gain equals long term pain as both these options do not actually help you pay off your loan any quicker – in fact quite the opposite. The idea of freeing up equity and/or reducing your repayments is all about keeping you in debt for longer. 

Remember that lenders, brokers and planners all benefit from your debt and it is in their interest to keep you in debt and tied to them for as long as possible.

If you are thinking of refinancing ask yourself “why?”. If you want to free up some equity or reduce your monthly payments to improve your cash flow – think twice before you sign on the dotted line.

I’m not saying “don’t do it” – just be aware that by doing so you are potentially entering into another 25 to 30 years of debt. You can afford the repayments now, but what happens when you retire and you still have another 5-10 years left on your home loan? Will your Superannuation support you and your home loan? Not likely – what happens when you are 70, retired and cannot afford the repayments on your home loan?

Make sure that you are going into it any refinance deal with your eyes wide open and don’t let anyone convince you that freeing up equity is giving you free cash – nothing is free, but the time really hits it may be too late.