Homeowners can often save a lot of money by refinancing their home loan. But there is much more to it than just discovering a low interest rate and switching lenders to take advantage of it.
Whatever your motivation for refinancing, keep in mind that if you’re not careful, you could make a costly error. You can prepare yourself to make good choices and come out ahead by reading through the following 10 common errors.
10 Refinancing Mistakes
1. Not Comparing Lenders
Many people settle on a refinancing option without first comparing different lenders and the rates and benefits they offer. The widespread assumption that it’s easier working with your present lender is false; refinancing is the same procedure whether you go with your current lender or find a new one. Furthermore, being loyal to your current lender can cost you. A bank’s system can see if you are a loyal customer, and won’t give you as good a deal as they will someone who isn’t loyal to them. Plus, a new lender may offer you rates and benefits you don’t currently receive. Even small improvements, like a 10th or quarter of a percentage point difference in your mortgage rate can result in tens of thousands of dollars in savings over the life of your loan.
Getting at least a few estimates of rates, terms and fees from multiple lenders is essential to making the most of refinancing.
2. Looking Only At The Interest Rates Or Cashback Offers
One of the biggest mistakes borrowers make is focusing only on the interest rate when comparing mortgage lenders. Changing to an identical product from another lender to save 10 basis points on your loan can put you in a worse position if the other terms of the loan outweigh the lower interest rate. Closing costs can vary widely from lender to lender, and a seemingly low rate may come with unusually high fees.
During your evaluation, make sure to look at the best rates available. Banks don’t always advertise their best rates and even when they do, those figures exclude fees and other costs. To cut through all this noise to find the best deal, contact Home Loan Experts on 1300 889 743. Our expert brokers will make sure you have all the details.
Refinancing only to receive a cash back incentive is dangerous as well. Many customers are enticed by the $3000, $4,000 or $6,000 refund, but you need to be aware that short-term gain usually does not outweigh the long-term cost.
3. Refinancing At The Wrong Time
It’s best to apply for refinancing when you’ve got all of your ducks in a row: when you’ve been making repayments on time and are a valuable customer whom the bank doesn’t want to lose. But there are other factors to consider to determine when the time is right, depending on what you hope to achieve. For example, if you have a fixed-rate loan that is near the end of its term, it may be best to wait until the term has ended to start a new loan term, rather than refinancing and incurring break costs. Also consider your future plans (renovation, investing in another property, starting a family) before you refinance. The new loan should meet your future needs.
Note that if you refinance to consolidate debts, you can make that part of the loan short term. For example, if you consolidate a $50,000 credit-card debt into your home loan where you owe $300,000, the new loan amount will be $350,000. But you can keep the $50,000 portion on a shorter loan term . If you extend the term over which you pay your short-term debt to the full term of your mortgage, then even if the rate is lower, you end up paying more in interest.
You have to know the right reasons to refinance to get the best deal for your situation.
4. Refinancing Too Often
If you have already refinanced your mortgage but want to do it again because the interest rates have reached historical lows, it might get you into problems if you’re not careful.
The issue is that refinancing is costly. Closing expenses for refinancing a mortgage typically range from 3-6% of the loan total, although it’s less expensive with high-balance loans. To make refinancing worthwhile, you must save enough on interest to offset the closing costs.
Some homeowners make the error of refinancing their homes too frequently. They accumulate closing expenses over time, increasing their loan debt and offsetting the benefits of refinancing in the first place.
5. Prolonging Your Loan Term
Extending your loan term may make sense if you’re financially challenged and need to lower your monthly repayments or pursue a debt consolidation loan or other types of cash-out refinance that increase the balance on your original mortgage. But be careful about moving from one long-term mortgage to another. If you have a 30-year mortgage and have had it for several years already, you’ll have to start over if you are refinancing to a new 30-year mortgage.
You can refinance into a new, shorter-term loan that almost matches the remaining time on your current mortgage. Because shorter-term mortgages have lower interest rates, you may be able to reduce the length of your loan while maintaining the same monthly repayment.
Broker Tip: In addition to refinancing to a loan term that matches your previous term, you can also make repayments above the minimum, so if you have a 30-year term, you can pay it off in 20 years.
6. Falling Prey To Honeymoon Rates
The banks offer first-time home purchasers and refinancers a lower interest rate for the first year to lure them into using their products and services. Since honeymoon rates revert to higher rates at the end of the introductory period, you could fall victim to predatory lending.
The honeymoon rates are extremely low initially, but you might struggle with mortgage repayments that you can’t afford when they revert. So, you need to consider your ongoing interest rate, not just the rate during the introductory period.
7. Not Knowing The True Cost Of Refinancing A Home Loan
Sometimes the savings you make by refinancing are outweighed by the expense involved. For example, if you have a fixed interest rate, you need to consider that you will have to pay a high break fee to refinance. Do not refinance to a fixed rate if you plan to make extra repayments or are likely to sell your property soon.
You can make a better decision when you’re aware of the application fees, setup fees, and break costs of the lender you want for your new loan. Find out about the upfront fees, and then conduct a thorough cost-benefit analysis before you go ahead.
8. Cashing Out Too Much Equity At Once
A mortgage refinance allows you to borrow against your home’s equity. You can use the funds for things like home repairs, investments, or another significant purchase. Mortgage interest on income-earning properties is typically tax-deductible, making it a tempting method for borrowing money.
When homeowners take out too much equity, they expose themselves to risks. You could be negatively impacted if your property value falls or your mortgage repayments increase to the point where you have little margin for error if financial issues arise. Be cautious when refinancing to cash out the equity of your property.
9. Assuming Refinancing Will Be Approved
If you apply for refinancing, you might believe that you would get approval quickly and easily because you have already been approved for one mortgage. However, refinancing is not just a simple paperwork process. Each time you refinance, you must go through the formal application process again.
The lending market is constantly changing. For example, as of May 2022, both interest rates and serviceability buffers are higher than they were a year ago. Even if your financial position is as good or better than it was when you got approval for your current mortgage, approval for refinancing is not a sure thing.
10. Not Having A Broker For Advice
A broker will take the time to get to know you and your situation and goals. They’ll dive into a discussion and comparison of interest rates and the costs of obtaining each rate. They’ll discuss the advantages and disadvantages of a 30-year loan versus a 20- or 15-year loan, and they’ll educate you so you can make the best decision.
If you have a fixed-rate mortgage, for example, an experienced broker can advise you on whether breaking the loan is a wise decision. It could be a case of short-term discomfort for long-term gain.
Brokers will also guide you through the documentation process so you clearly understand the terms and conditions. Hence, make sure you obtain assistance when you’re making decisions that will have a long-term impact on your finances and life.
Consult An Expert
At Home Loan Experts, we are professionals at assisting borrowers through the maze of paperwork and lenders so they can make good decisions and get the home loan they want.
Call us on 1300 889 743 at any moment for help through the refinancing process, or enquire online.