Know the Costs of Refinancing
Refinancing your home loan is one way to save money. When refinancing you replace your existing loan with a new one on more favourable terms – for example, at more competitive interest rates, that might offer savings on your regular outgoings in loan repayments or reduce the amount of interest you pay over the length of the loan. While most of us are aware that there some upfront costs to be paid when you take out a new home loan, if you haven’t refinanced before you might be surprised at some of the charges and costs entailed in switching loans.
How To Determine Refinance Costs
Before you can make an informed decision about the best home loan to refinance to, you need to have all the information about the costs you will be charged to refinance your existing loan. To build an accurate picture of the refinance costs you will have to pay:
- Speak to your existing lender first but get their offer in writing. Your existing lender is likely to be very eager to keep your business and as a result may offer you a significantly reduced interest rate or an attractive fee waiver. To make sure you can compare this offer to other refinance deals and costs have your existing lender create a written outline of their deal so you can go back to them if they turn out to be the best and you know the offer is likely to be honoured.
- Get a written statement of all exit fees and new application fees. It makes sense in your comparisons to get all the fees you will be charged clearly outlined in writing. This means you have exact figures to work with when weighing the exit fees and application fees against the savings you will make in interest for example sample.
- Get a written statement of interest charges for your new and existing loan. This will help make sure you know exactly what interest rate you are being charged currently and how that compares to the fixed and variable rates and terms available if you were to refinance. This is the final piece in your puzzle to help you calculate the benefits and costs of refinancing.
Upfront costs when you refinance
A home loan is a major financial transaction so it’s not surprising that there will be some upfront payments to be made at the time your new loan is set up. You’ll find that:
- Establishment fees are charged by the provider of the new loan. The new lender charges for the administrative cost of setting up the new loan, with fees variously called handling, establishment, and settlement fees. Some lenders also charge for a valuer’s assessment of the property. There may also be mortgage insurance to be paid if the amount you borrow is more than 80% of the value of the property. Mortgage insurance insures the lender not the property, it protects the lender against loss if you default on the loan.
- Taxes are charged by the government. The states and territories of Australia impose stamp duties and other fees when a property changes hands or a home loan is taken out. Stamp duties vary between the states and territories. They can add considerably to the cost of refinancing because they are usually proportional to the property’s value. For example on a home valued at $300,000 stamp duty ranges between $8,975 in Queensland and $13,660 in Victoria. Because it depends on the location of the property as well as its value and other details, calculation of stamp duty payable is complex and an online home loan calculator will help you work out how much stamp duty you are likely to pay.
Some refinance costs that you might not expect
If you’ve taken out a home loan before you’ll be familiar with the lender’s fees and government charges mentioned above. But if you haven’t refinanced before you might be taken aback by other costs that you were not expecting. You should be aware that:
- Exit fees will be charged. Each home loan contract has provision for the lender to be compensated for losses that result from the loan being repaid earlier than the expected date. As your current lender is earning interest from your loan, if you pay out the loan early the lender is entitled for the loss of interest. Exit fees can be either flat fees or a percentage of the value of the loan and the amount of interest the lender could expect to receive over the length of the loan, so if you exit in the early years of a home loan fees can run into thousands of dollars.
- Refinancing may cost you more in interest. The new loan could cost you considerably more than the existing loan in the long term, for example if you refinance to a loan at a lower interest rate but extend the loan period.
Now that you are aware of the costs you might have to pay when you refinance your home loan, use this information to compare the benefits of different home loans available to you. For more help with your comparisons and calculations, contact Home Loan Finder.
Related posts:
- Costs of Refinancing
- Weighing Up The Costs Of Refinancing
- Refinancing Closing Costs
- Refinancing traps and how to avoid them
- Exit Fees And Refinancing
- Refinancing Risk
- Mortgage Refinance Costs
- How Does Refinancing Work?
- Can you Save Money by Refinancing
- When Refinancing Doesn’t Make Sense
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