When is refinancing not worth the hassle?

Are you thinking of refinancing your mortgage? Before you begin sorting through loan applications, it pays to seriously consider whether refinancing is worth the hassle.

 

There are plenty of reasons why you may be considering refinancing your home loan.

 

It might be a cheaper interest rate that has tempted you to switch lenders, or you may be seeking to consolidate all of your loans and debts to one lender.

 

However, there are some situations where borrowers should avoid refinancing, says Tony Beck, head of corporate and social responsibility for Members Equity Bank. According to Beck, refinancing may not be worth the hassle when…

 

It may not be worth the hassle of refinancing in order to secure a slightly lower rate if you’ve already established a good relationship with your current lender.

 

“In these circumstances, chasing the small reduction in interest rate may prove to be a mistake,” he explains. “As with other industries, you get what you pay for – and the small reduction in interest rates may mean you’re not as well looked after.”

 

You need to consider how long you have been paying off the loan so far, and how long you plan to hold it for in the future.

 

For instance, if you’ve been paying your loan for 15-20 years already, then refinancing over a longer loan term will immediately reduce your monthly repayments. But, it will cost you many more years and much more money in the long-term.

 

Do your calculations to ensure that the benefits you’ll receive by refinancing are not outweighed by any deferred establishment fees, penalty fees and exit fees that your current lender may impose on you for closing your loan early.

 

If you used a mortgage broker to secure you loan, they may also try to claw back some fees from you if you refinance within the first three years, as they will miss out on trailing commission from the loan.

 

“Refinancing isn’t for everyone,” says Michael Quinn, director of legal and financial services provider, The Quinn Group.

 

“If the current rate on your loan is comparatively low, there may be no benefit to be had from refinancing. In fact, you may end up incurring more costs when exit and other administration fees are taken into account.”

 

Before you dive into a refinance, check your original loan documents carefully to see exactly how much you’ll need to pay in order to close your loan. Also be sure to take into consideration any loan application fees and bank fees you may be hit with if you decide to proceed with a refinance.