Refinancing is the term used for arranging to pay out an existing mortgage with a new loan.
With interest rates at historical lows, many home owners and investors are lining up to refinance their mortgages.
But is it the right move for you?
The benefits to refinancing can be real, offering the possibility of savings on mortgage repayments or the opportunity to use equity to invest.
Here’s some things to look out for if you’re considering making a move.
Top 5 refinancing pitfalls
1. Automatically refinancing with your current lender without shopping around
Remember, that’s what we, as your mortgage broker, are here for – doing all the legwork on shopping around amongst lenders to find you the best rate.
You may have a good relationship with your current lender, but the loan market is very competitive and loyalty will not save you money.
Take your good credit history to the lender that gives you the best rate and benefits.
2. Assuming lower rates will save you money without considering the overall costs of refinancing
Sometimes the savings you will gain on mortgage repayments are outweighed by the costs of making the switch.
We can help you calculate the costs – things like break fees, establishment fees for your new loan, legal fees, stamp duty and ongoing fees – to see if these add more to your mortgage than you would save by refinancing.
3. Procrastinating while waiting for interest rates to drop
If interest rates are currently much lower than the rate you’re paying on your mortgage at present, then waiting to see if they will drop even further is a missed opportunity to save.
Interest rates may go up as well as down!
4. Not having your mortgage broker evaluate your credit rating and financial position to assess your lending power and get you the best rate
Everyone’s financial situation changes over time, often for the better.
As your mortgage broker, it’s our job to help you put your best foot forward with the lenders.
Evaluating your credit rating and financial position are key to securing the best rate and benefits for you from your new mortgage.
5. Falling prey to ‘honeymoon rates’ which revert to a higher rate at the end of the introductory period
Understanding the finer points of an advertised mortgage offer takes a lot of hard work.
It’s easy to have your head turned by what sounds like a good rate without understanding all the conditions and possible expenses.
If you’ve been impressed by an offer, it’s a great idea to have your mortgage broker check it out to see if its everything you believe it will be.
When refinancing makes sense
If you’ve had your mortgage for a while and are paying high interest rates, then refinancing is definitely worth considering.
Sometimes your lender will not stay competitive with others in the market and if this is the case, they deserve to lose your business!
It’s also a good idea to consider refinancing if a major change for the better occurs in your financial situation.
This could help you secure a better rate, even if interest rates have stayed the same.
You could also consider refinancing if you are looking to free up some money.
Good reasons to do this may include home renovations, financing your child’s education or using your equity to invest in more property.