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Refinancing traps and how to avoid them
Andrea Sophocleous investigates the tips and traps for refinancing your home loan.
October 27, 2009
As interest rates begin to creep upwards, home owners are more likely to consider refinancing their home loan in a bid to score a better deal.
Refinancing involves taking out a new loan – usually with a lower interest rate or other attractive features – to pay out your existing loan. This can be with another lender, or your existing lender.
Opting out of your current home loan to refinance with a different lender can have obvious benefits – a mortgage with even a minimal interest rate reduction can help save you thousands of dollars over the term of the loan. But before you take the plunge, you will have to factor in some upfront costs – these may include exit fees from your existing loan, establishment fees for the new loan, loan approval fees, mortgage insurance, and settlement and handling fees for starters. You may also have to pay additional stamp duty.
Establishment fees for new loans can be up to $800, while exit fees can be a percentage of the original amount borrowed – resulting in a hefty sum of money. Already, the cost of refinancing may run in the thousands.
You can avoid some of these fees by shopping around for a new loan without set-up fees or for a lender willing to waive the fees. If you are part-way through a discounted introductory rate, the exit fee will be higher than on a standard variable interest loan. The impact on any money you hope to save by refinancing can be substantial in this instance.
To avoid falling into any unexpected traps, talk to your lender first. You may be able to secure a better home loan deal with them without being slapped with a host of fees.
If you are selling your home and buying a new one, you should also explore the option of “loan portability”. Instead of refinancing, you may be able to carry your existing loan from one property to another. Loan portability can do away with establishment fees and other costs, thus saving you money and time spent on paperwork.
Refinancing is a serious financial decision, which requires careful consideration and research. Shop around to compare various offers, and be aware of all hidden costs. Drawing up a list of the costs involved in refinancing, and the amount you expect to save if you do, will help you make an informed decision.
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