3 refinancing tips that could save you thousands
I’ve got a pretty good mortgage rate, but there are some really good rates out there at the moment – I don’t need to mention the 4.54% rate on offer at Switzer Home Loans! Anyway, I’ve been seriously considering refinancing.
The good news is that exit fees don’t exist anymore for new loans, unless of course you have a fixed rate mortgage. Fixed rate mortgages still incur break fees. This makes sense, at least to me. The bank isn’t offering you lower rates for nothing. It’s offering them because it wants your money for longer, so if you try and renege, it’s going to want something from you.
Let’s assume you have a variable rate mortgage and are looking to refinance.
Here are three things to keep in mind.
1) Compare apples with apples
Over a decade ago, a law was introduced that required lenders to use rates that incorporate all fees and charges of their product into the one flat rate. This is called the comparison rate.
It meant that if Lender A offered a rate of 6.9% and fees of 0.5%, while Lender B offered a 7% rate but fees of just 0.1%, then Lender B would be able to show it was the cheaper offering by using one flat rate of 7.1%, compared to Lender A’s 7.4%.
So when considering refinancing, make sure you look at comparison rates – not rack rates – and ask your lender for a key facts sheet.
2) Change of lifestyle
You need to consider if your circumstances have changed since you took out your first mortgage. Once you’ve discharged your loan, you’ll need to go through the whole application process again. So, for example, if you started working for yourself since you took out your first loan, your new lender might want a bit more collateral, and information about your company, before it approves the new loan.
3) Know the costs
Banks are no longer allowed to charge exit fees, they were banned for new loans taken out after 1 July 2011. But if your loan was taken out before then, you may be charged a fee (although they were usually only charged in the first three to five years, so you might be OK). If you’re breaking a fixed-term rate loan, you’ll have a break fee.
You’ll also have all the usual charges associated with applying for a home loan – application fee, valuation fee, settlement fee and legal fees, which could run into a few thousand dollars. There is also mortgage lenders insurance if you are borrowing more than 80% of the value of the home.
If you are borrowing more than the original loan, you may have stamp duty, depending on your state.
But lets say, for example, that it did cost you $3,500 to refinance, which is probably on the high side. If you’re refinancing $500,000 and have 25 years left on your mortgage, if you go from a 5% rate to our 4.54%, you’ll save nearly $40,000 during the course of the loan. Your monthly repayments also drop from $2,933 to $2,801. So that will see you at least $35,000 ahead, if not more!
As you can see, refinancing can save you thousands of dollars, but make sure you run all the numbers first to make sure you don’t get caught out. If you do your homework, you’re sure to benefit!