With record low rates on offer it can be tempting to refinance to a better deal – just be sure you’re not falling into some classic traps.
Get the most from refinancing by avoiding these DON’Ts:
Making multiple applications – it’s an easy way to wreck your credit record
Refinancing involves taking out a new loan to pay out the old one, and starting the process of paying off the new one.
It’s important to spend some time shopping around for the right loan and making a single application to just one lender because every time you apply for a loan it will be noted on your personal credit record. That’s a record of how well you’ve handled debt in the past and lenders use it to assess what sort of a risk you represent. Making multiple applications will raise questions about whether you’ve been rejected by other lenders – and why.
Skipping your current lender – they could come to the table
If you’re looking for a lower rate or better features, talk to your current lender before looking elsewhere. Nothing makes a lender sit up and take notice more than a customer who’s ready to walk, and it could be a lot easier to stick with the same lender than to jump ship.
Assuming refinancing will leave you better off
Refinancing comes with costs – including a range of charges associated with closing the old loan and fees attached to the new one. Crunch the numbers or ask your broker to do it for you, to see if refinancing will genuinely put you in front financially. This especially applies if you’re refinancing to consolidate debt. Folding a short term debts like a credit card into a long term debt like your home could mean paying more in overall interest unless you commit to making additional repayments.
Overlooking lender’s mortgage insurance
If your refinanced loan is worth 80 per cent or more of your home’s value chances are your lender will ask you to pay LMI. You may be able to capitalise the cost, meaning it’s added to the loan and paid off gradually but that also means adding interest charges to the initial premium.
Not speaking with a broker
Your broker makes refinancing easier by comparing a broad range of loans and lenders on your behalf to find the loan(s) that are right for you. You’ll also get help completing the application paperwork, and that’s what refinancing should be all about – making your loan and your life a lot easier.