Refinancing your home loan can be a fantastic opportunity to save money in the long-term and help pay off your mortgage faster. However, refinancing can come at a price and you need to be aware of the potential costs and implications involved in refinancing your home loan before you go ahead.
Factors Affecting Refinancing Costs
There are several factors that will influence how much you will have to pay to refinance your home loan. The two main factors relate to your existing home loan and your potential new home loan. Different lenders have different rules and costs.
The value of your property, as well as the amount of your mortgage will also affect what cost you will pay to refinance.
So what fees can you expect to pay when refinancing your home loan? Let’s take a look.
Potential Costs for Refinancing your Home Loan
There are various fees involved in refinancing your home loan. While each separate fee may seem quite small – they can easily add up to thousands of dollars. So it is essential that you do plenty of calculations to establish whether or not refinancing will actually save you money.
Your existing lender will most likely have an exit fee – and this varies between lenders. Often the longer you have left on your home loan, the more expensive your exit fee will be. The type of loan you have will determine the cost as well – fixed rate loans are usually much less flexible and have higher exit fees. The exit fee can amount to 6 months of your home loan’s interest, so it can be a relatively large amount!
It is not only your current lender that will charge you fees – expect to pay application, establishment and handling fees from your new lender. These fees can be very high – however lenders often offer favourable deals, including cutting fees, to lure in new customers.
Some lenders, although a lot less now than previously, will also charge you a valuation fee prior to processing your application. The cost of this varies between lenders and locations. Additionally, if your home loan is upwards of 80 percent of the value of your property then you can expect to have to pay for mortgage insurance.
Ongoing Cost of Refinancing your Home Loan
While there are the basic fees that we mentioned above, there are also ongoing costs that you need to be aware of before refinancing your home loan.
The main cost that will hit you throughout your home loan term – whether refinanced or not – is of course interest.
The interest rate you are charged will almost certainly change throughout the course of your home loan – and what may have been a great value interest rate at the time your loan was established, may not be so good anymore. One of the many reasons why people choose to refinance their home loans is to switch from a fixed rate loan to a variable rate loan and vice versa – or to get lower interest rates.
Before doing so, you should always thoroughly research how much different your new interest rates will be compared to your existing rates. Many people, when refinancing, choose to switch to a longer term loan with lower interest rates and smaller monthly repayments. However, it can often work out to be more expensive – as over that longer period you could be paying more money in interest than you would have over the shorter period at the higher rates.
So in summary; do your homework and look for costs in exiting your existing loan, and try to look at the total cost of refinancing - rather than one aspect of a new loan.