Top 15 Mortgage Refinancing Mistakes to Avoid

Date: 30/03/2011

Finding a cheaper home loan than you currently have doesn't necessarily mean you will be better off after you make the change. Your Mortgage lists the following traps to look out for when making the refinancing decision.

1. Automatically refinancing with your current mortgage lender without shopping around

2. Assuming lower interest rates will automatically save you money without considering overall cost versus savings

3. Procrastinating over applying for a home loan while waiting for mortgage interest rates to drop. Don't gamble on better future rates

4. Failing to get your new interest rate locked in writing while processing takes place

5. Switching loans or lenders without clarifying in writing whether the total costs (including establishment fees, legal fees, stamp duty fees, ongoing fees) are outweighed by the savings in interest

6. Not having a lender or mortgage broker evaluate your credit rating and regularly revise your financial position

7. Not knowing the true cost of refinancing. Make sure your lender provides you with written statements on application fees, deferred establishment fees, or break costs on fixed rate loans.

8. Falling prey to the lure of honeymoon rates (also known as introductory rates), which ultimately revert back to their original or higher rates at the end of the introductory period

9. Falling prey to predatory lending because you haven't done your due diligence to find the right home loan

10. Refinancing to withdraw equity in order to pay off credit cards with no intention of changing spending behaviour. Don't turn what could be a short-term debt into a long-term debt

11. Entering into a refinance deal that gives you relatively little benefit but pushes your loan value above 80% of your home's value so that you pay lender's mortgage insurance

12. Change to an identical product from another lender just to save 10 basis points on your loan, so that you're actually worse off after accounting for fees and charges

13. Borrow more than you need and end up facing mortgage repayments you cannot afford - leaving you on a downward spiral and needing to refinance again

14. Switch from variable to fixed or fixed to variable because that type of rate is lower at the moment - then wonder why you did it when interest rates change again

15. Roll smaller debts into your home loan, but extend the term of your home loan so that you are effectively paying interest on small debts over 30 years, instead of the previous one or two