3 min readA home loan refinance is when you trade in your current interest rate for a new one. Plenty of us make the mistake of picking the lender with the sharpest rate, but it’s not that simple. When it comes to refinancing a home loan, doing your research can be the difference between saving or losing thousands of dollars.
Before you sign on the dotted line, here are five refinance mistakes to avoid.
5 common home loan refinance mistakes
Mistake #1 – Refinancing for no reason
A pretty self-explanatory mistake. Don’t make the error of refinancing without having a goal in mind. Before you begin, do your research.
There are many reasons why you might refinance a home loan. You might want to use home equity for renovations or save money in the long run. It is important to ask yourself ‘why?’ you want to refinance.
Some people forget to consider both sides of the picture and this can make it harder for themselves in the long term. Several factors could have changed since your original mortgage approval – job, income, property value. Shop around first, crunch the numbers with your broker and consider the pros and cons of refinancing.
Mistake #2 – Forgetting about extra fees and costs
You hope a refinance will save you money, but this is not always the case. There is a range of fees and costs involved in a refinancing that you need to be aware of. You are going through the home loan process again, so the same fees may apply.
Early exit fees for variable loans no longer exist, but you can still be charged for breaking a fixed-rate period. Check how much the break costs would be, and then work out if it is worth the refinance. Be aware, you may need to pay lender’s mortgage insurance to your new lender if your property value has dropped.
These extra costs can include:
- Establishment fees ~$150 – $700
- Break fees (situational)
- Mortgage discharge fees ~$100 – $200
- Ongoing admin fees ~$5 – $20 per month
- Lenders mortgage insurance ~$5,000 – $30,000
Mistake #3 – The rate is not everything
While many borrowers focus on the interest rate, it should not be the only reason to refinance. Ultra-low mortgage products might be missing desirable features like an offset account or the ability to split the loan. Be smart about it and always read the fine print.
The most important thing to do is understand if a refinance suits your broader goals. Would you like to reduce your monthly repayments by lowering the rate and extending the term? Alternatively, if you’re in a strong financial position, you may choose to keep repayments the same to pay off your mortgage sooner.
Consider the comparison rate to help you work out the true cost of a loan. As always, the best thing you can do is shop around and you can always get a mortgage broker to help you compare different options.
Mistake #4 – Your Credit Score has changed
Like any loan, lenders assess your credit history every application. If your credit score is worse than before, you might face problems when you refinance.
Any major changes to your debts and spending since the original approval can impact your borrowing power. With lenders tightening standards in recent years, you need your finances sorted. If a bank declines your refinance because your debts are worse, you will be out of pocket the time and money spent on the application.
Mistake #5 – The value of your property has changed
You can face serious issues if the dollar amount of your property has decreased. A refinance is likely to be declined if your property has lost value. This is more common in a market downturn when buyers end up with a mortgage greater than the property value.
Additionally, you may have to pay lender’s mortgage insurance if your LVR (i.e. Loan to Value Ratio – the amount you borrow as a percentage of the property’s value) has risen above 80 per cent. If you think you might be in a spot, consider evaluating your property’s value before you refinance.
Is refinancing right for you?
Before you refinance, ask yourself what the reason is for doing so. Do some research to work out if it is the right thing for you. Nobody wants to be worse off after a refinance.
If you’d like more information about refinancing, the risks involved, and the benefits, get in touch with a mortgage broker.