20 Sep 6 common refinancing traps to avoid
Refinancing your home loan can be an excellent way to save money, but without the right approach, it can also lead to mistakes that might actually end up having a negative impact.
Knowing your goals and the benefits of refinancing is the best place to start to avoid refinancing for the wrong reasons.
Here are six common traps to watch out for:
Focusing only on the lowest interest rate
While a low interest rate might catch your attention, it’s important to consider the bigger picture. Fees, closing costs, and loan terms can affect how much you end up paying in the long run. Remember, the lowest rate doesn’t always mean the best deal once you factor in the overall cost of borrowing.
Underestimating the total cost of refinancing
Refinancing comes with fees that can add up quickly, like application fees, government fees, and possible prepayment penalties on your current loan. Be sure to calculate the break-even point to see if the savings from a lower rate outweigh the costs. If you plan to move or pay off the loan soon, refinancing may not make financial sense.
Extending your loan term without considering the long-term impact
A longer loan term might mean lower monthly payments, but it can also lead to more interest paid over time. It’s essential to balance your need for affordable monthly payments with your long-term financial goals. Extending the loan without careful thought may cost you more in the long run.
Not comparing offers from multiple lenders
Refinancing with the first lender you approach could mean missing out on a better deal. Shop around and compare offers from several lenders. Interest rates, fees, and loan terms vary, and negotiating can often lead to better terms. Taking the time to compare can result in substantial savings.
Refinancing without a clear purpose
Refinancing should serve a specific financial goal, whether it’s lowering your monthly payments, paying off your loan faster, or accessing equity. Refinancing without a clear plan can lead to unnecessary costs and could ultimately result in paying more interest over time, especially if you’re resetting the loan term with each refinance.
Overlooking smaller lenders
Large banks aren’t your only option. Smaller lenders often offer competitive rates and can provide a more personalised service. Consider all your options, including smaller or private lenders, who may have more flexible products or terms that better suit your needs.
Talking with a mortgage broker in Melbourne can help you compare your options and make sure you’re on track with your financial goals.
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