Refinancing dos and don’ts

June 29, 2011

Don’t:

• Bundle your smaller debts into your new home loan. This will extend the life of the loan and means you will be paying interest on the little debts for up to 30 years.
• Get over-excited about the amount of money you can borrow. Over extending yourself with repayments may only lead to the need to refinance again down the track.
• Be sucked in by headline or honeymoon rates, which may incur hefty fees and charges down the track or revert to unmanageably higher rates after the first year.
• Never refinance in order to use home equity to pay off smaller debts such as store and credit cards –unless you are willing to stop the spending behaviour that landed you in trouble in the first place.
• Get locked into a deal with few benefits that pushed the value above 80 percent of the property’s purchase price, as you will end up having to pay Mortgage Lenders Insurance on top of everything else.

Do:

• Shop around before automatically signing on to a new loan with your current lender. Current competition in the market means you have leverage when it comes to negotiating a better deal.
• Sit down and work out the total cost of refinancing. This includes discharge, establishment, legal and stamp duty fees if you are moving on to a new property. The total cost of making the switch must be less than just working out what you will save on interest.
• Make sure your new bank or lender provides you with written confirmation of the interest rate agreed upon during your application process.
• Pause for breath before reacting to interest rate speculation and changing your variable rate loan into a fixed term. You may find yourself stuck with a higher rate if the wind changes direction again.

Related mortgage links

• Best Home Loans
• Home Equity Loan
• Loans.com.au Dream Loan Express
• Take the money and run: Should you refinance your home?
• Cut mortgage fees with a few simple tips
• Illawarra Home Loans – Bank Beater