Refinancing Risk
When you refinance a loan there are some risks involved. The main risk is that you will actually end up paying more money on the new loan than what you were on the old loan. This article will explain all the risks associated with refinancing your loan.
Why Refinance your Loan
Before you can understand the risks that are associated with refinancing a loan you must first understand why people refinance. This section will explain the main reason behind people’s decisions to refinance. These reasons are:
- Interest rates are low. You may have locked in an interest rate that you thought was low at the time. However as the economic conditions changed the interest rates that are currently on offer are lower than what you receive. Many people think that by paying the fees associated with refinancing your loan you are able to save money by taking advantage of the low interest rates.
- Your financial circumstances have changed. You may have had a fixed rate loan with few features and you may stop receiving an income. Many people will refinance their loans to switch to a variable rate loan with the option of paying only the interest for a while, thereby dramatically reducing the amount you repay.
Costs Associated with Refinancing
What many people don’t take into account is the costs that are associated with refinancing a loan. This section will detail some of the charges that are associated with refinancing a loan. These charges may include:
- Additional repayment fees on fixed rate loans. Fixed rate loans have fewer features and rarely allow you to make additional repayments without extra charge. If you are on a fixed rate loan and refinance the loan you may have to pay a large fee to make the additional repayment to pay off your old loan.
- Transition fees. Most providers will charge a fee for simply refinancing your loan, these are called transition fees. These can dramatically increase the cost of the refinance.
- Exit fees. Your old loan may have a term that will charge you an exit fee if you repay the loan too early. These fees can be a few thousand dollars and will be payable when you refinance.
- Will you save money. The main question is that when you add up the cost associated with closing the old loan will you end up saving money. You may end up paying more by refinancing even if the interest rate is lower than what you were on previously.
Fees on your New Loan
In addition to the fees that are charged for a refinance the loan that you are switching to may not be as good as it first appeared. This section will explain some of the additional costs that can be associated with loans with low interest rates. These costs can include:
- Fees that are charged on the new loan. You will have to make sure that the new loan does not charge large ongoing fees. These fees can increase the amount you pay over the course of your loan quite significantly.
- Application fees. When you apply for a new loan you will have to pay application fees, legal fees, etc. When you refinance you will still have to pay these fee. Make sure these costs are included in your calculations.
When you refinance your loan you must make sure that you are not going to end up paying more money than you were on your old loan. Even though the new loan may offer a lower interest rate you may find yourself paying more money through the cost of the refinance and additional fees that are charged with the new loan. If you have any questions about the risks of refinancing please contact us.
Related posts:
- How Mortgage Brokers Can Help with Refinancing
- Benefits of Refinancing a Home Loan
- Weighing Up The Costs Of Refinancing
- Best Refinancing Loan
- Can you Save Money by Refinancing
- Prepare for Rate Rise or Risk Needing a Second Job
- Refinancing Closing Costs
- Debt Refinancing
- Exit Fees And Refinancing
- Costs of Refinancing
Top Home Loans
| Home Loan | Details | Interest Rate (p.a.) | Comp Rate^ (p.a.) | App Fee / Ongoing Fee | Max LVR | Min & Max Borrowing | |
|---|---|---|---|---|---|---|---|
 Loans.com.au - Dream Catcher | A home loan offer with a $0 application fee and one of the lowest available home loan interest rates. | 5.85% | 6.21% | $0 / $375 | 80% | $50,000 / $750,000 |
 
|
 Bankwest Online Home Loan | A low interest rate home loan with a $0 application fee and ongoing maintenance fees. This offer is exclusively available by applying online. | 5.97% | 5.97% | $0 / $0 | 80% | $100,000 / $1,000,000 |
|
 State Custodians Mortgage Company Standard Variable Offset Loan | Awarded Mortgage of the Year 2012 – this multi-award winner features 100% offset and a loyalty 0.25% rate drop after 5 years. | 6.02% | 6.23% | $0 / $345 | 95% | $150,000 / $1,000,000 |
|
 Illawarra Home Loans Bank Beater Home Loan | A low variable rate, beaten down even further by 0.05% p.a. after 5 years. | 6.07% | 6.35% | $0 / $345 | 90% | $250,000 / $1,000,000 |
|
Ask A Question