Refinancing myths and reality checks

By Gerv Tacadena

Refinancing is a great solution if you are burdened with financial worries but in some cases, you might be better off without doing it

Despite the mortgage information available online, many borrowers still fall victim to the biggest refinancing myth of all: if you refinance, you will be much better off financially.

While it is understandable that borrowers want the best home loan for their situation, it might not be in their best financial interest to refinance. Borrowers who try to refinance need to ensure that their financial health makes for a good refinancing candidate.

Here are some of the myths surrounding refinancing you should know about before reaching out to your lender and filing that application:

Myth #1: It’s all about getting the lowest rates

One of the biggest refinancing myths is the idea that a low rate means a better loan offer. While a low interest rate would undoubtedly trigger pangs of mortgage envy, it should not be the sole reason why you should switch your loan.

Many borrowers often overlook the fact that most of these low rate loans are either short on features or that they only last for a certain period and not for the term of the loan. Most of the time, the more likely scenario is that within six months your rate will be on the lower end of 'hot rates' or your loan will be lacking interest-saving features.

For instance, basic variable loans and low advertised rates are typically effective for those who require minimal features or flexibility. While some loans charge low interest fees, they do not offer features that can help you save in the long run, like extra repayments and offset accounts.

This means that a low rate does not always fit for most borrowers, especially those who would like to have some options. For some, they are more likely to accept a slightly higher interest rate in return for lower fees, decent customer service, and transparency in regards to exit fees.

With a low-interest-rate environment comes opportunity for lenders to compete. You are going to see deals which come onto the marketplace, which, at first glance, look fantastic. But look for the catch. It might be helpful to check the home loan’s comparison rate, which can help you get a clearer comparison of the true cost of the mortgage.

Myth #2: You must change lenders when refinancing

Another common misconception when refinancing is you have to go to a different lender to get a better mortgage deal. This, however, could be a mistake. When refinancing, your existing lender should be your first port of call — try to make comparisons between new loan products your lender currently offers and the others in the marketplace.

If you are happy with the service of your current lender but are not satisfied with your loan terms, it is best to talk to them first because they might have a better solution.

Furthermore, staying with your existing lender can not only save you time and hassle, but can often save you thousands of dollars in exit and establishment fees, as well as the big killer fee — lenders mortgage insurance (LMI).

Myth #3: Refinancing is easier because you already have a home loan

If you think you are already cleared of all the assessments needed to refinance just because you have already gone through a mortgage application process, think again — typically, refinancing can take just as long, and can be as nerve-wracking as getting your first home loan.

The entire refinance process could take an average of three to four weeks to reach unconditional approval. Two of these weeks will be used for getting your home valued and your existing lender being notified of the refinance.

Sometimes delays occur when your new lender sends a discharge request to your existing lender. Your current lender can take up to 14 days to reply with payout figures, and they are generally not in a hurry to get rid of that debt.

Myth #4: Debt consolidation is always a good idea

If you truly cannot see light at the end of the tunnel and your personal and consumer debts are forcing you backwards financially, consolidating your debts into your existing or a new home loan may be a good idea.

However, it can be a foolish step for borrowers who view consolidation as an ever-revolving lifeline or as a get-out-of-jail-free card.

Sometimes borrowers make the mistake of racking up thousands of dollars on their credit card after refinancing to consolidate their debts. This is not practical, as they could actually end up paying more interest than they would have on their credit card given that a mortgage term is longer.

Borrowers typically consolidate all of their debt into a home loan with a 30-year term to keep monthly commitments low. In the end, they eventually pay more interest.

The right mindset when borrowing is to finish paying off the loan in the soonest possible time to reduce interest charges. Thus, you need to consider paying off your consumer debt first.

An even better strategy is to pay the same amount that you were paying collectively for all of your credit cards, personal loans and home loans before the consolidation — you will be amazed at how much you can save.

In order to do so, you have to acknowledge and be conscious of your finances. The term of your loan can easily be extended if you're finding it hard to manage the higher repayments, or a change in financial circumstances requires it.

Furthermore, it is often a good idea for your broker or lender to attach a condition with your debt consolidation that requires you to show proof that all of your accounts, credit cards and personal loans with other financiers have been closed after the consolidation.

The most crucial part is to not spend the money that you are not putting into repayments each month, as the debt cycle will recommence. This is why any situation where you find yourself with more money in your pocket than in the previous months could be a real danger.

Consult with your lender and broker

You might think that refinancing is the solution to your current financial worries, but it is still best to reach out to your lender or broker to get some advice. They will be able to see and assess your finances on a different perspective, allowing you to gauge if you really need to refinance or not. Be sure to give them a call and discuss your situation before going ahead with any plans to refinance.

This post was originally written in July 2011 and was updated and rewritten for clarity and additional content.

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