Most common mistakes when refinancing
It seems everyone’s looking to save money on their home loan during COVID-19. First home buyers and existing home owners are scrambling to cash in on record low interest rates. For those looking to refinance their mortgage, home lenders are offering all kinds of rewards and incentives.
So how do you know what to look for, and what to avoid when you refinance? To help you refinance your home loan successfully, here are some of the most common mistakes people make.
Mistake 1: Moving your home loan around too much
A refinancing cashback offer can make it very appealing to move financial institutions. Some cashbacks can be worth $2,000, which can go towards upgrading a few things around your house. But before you switch, it’s worth considering that most lenders charge establishment fees for new loans, as well as home loan exit fees. You should also know that changing banks regularly may affect your credit rating. Plus, some lenders may ask you to pay back the cashback incentive (a clawback clause) if you refinance within a certain period.
Mistake 2: Focusing purely on the rate
Let’s face it, the interest rate on your mortgage is an important part of your decision – a few points can make a big difference. However, there are other things like the fees charged and features offered that can also save you a significant amount of money. In fact, they can even make you better off in the long run – especially if it helps you pay off the loan sooner. Look for home loans with no monthly or annual fees – these can really eat into what you’re repaying. Having the ability to redraw without any fees can also be helpful. Another worthwhile feature that’s commonly overlooked is being able to make unlimited extra repayments. No one wants to have their mortgage longer than necessary, so paying off a little extra without penalty could help you own your home sooner.
Mistake 3: Ignoring the comparison rate
While we’re on the subject of rates, it’s important to know the difference between the two interest rates that lenders promote to prospective customers. The first is usually the product’s annual interest rate, while the comparison rate represents the real cost of the loan per year, including any upfront or ongoing fees and charges. It’s important to pay attention to the comparison rate, since it’s a better reflection of the cost of a home loan. Calculating your home loan repayments based only on the interest rate may mean that you’re not incorporating the ongoing fees into your repayments. Instead, do your sums with the comparison rate. Another good tip is to get a home loan rate that’s closer to the comparison rate.
Mistake 4: Taking out another 30-year home loan term
If you’ve had your home loan for some time, it can be tempting to refinance with a new home loan term of 30 years. Sure, your repayments will probably drop significantly due to the lower rate. However, the downside is that you’ll add years before you pay off your home and also thousands of dollars in additional interest. If possible, carry over the remaining term of your existing home loan onto the new loan. This will give you the option to either pay off your home in the same time, or pay it off sooner by maintaining the same repayments, rather than dropping them to the minimum repayment.