- 22 Feb, 2017

What are the Costs of Refinancing Your Home Loan?

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Refinancing your mortgage could save you a lot of money if you do it right. If you rush into it, however, the often unpredictable financing expenses can turn your refinancing dream into a real nightmare. Careful calculation beforehand can help you avoid unwanted and unexpected refinancing costs. So what are the costs of refinancing your home loan? Here is a list of costs to look out for, and some tips to help you avoid these sometimes excessive fees.

What are exit fees?

Some home loans come with automatic exit fees, which means you will pay for terminating the loan too soon. The fees can be rather heavy, costing even thousands of dollars. These fees will be based on either:

  • A set fee
  • A percentage of the remaining portion of the loan

In order to ensure a good deal on a new mortgage, calculate this amount into the refinancing costs, and be sure to know exactly how much it will be beforehand.

What is Lenders Mortgage Insurance?

LMI, or Lenders Mortgage Insurance, is charged when the borrower is taking out a mortgage for more than 80% of the value of the house (LVI). If your home has dropped in value recently, you may not have enough equity in it to be able to avoid LMI, which can make your monthly payments uncomfortably larger.

To avoid these refinancing costs, you will need to provide at least 20% of the new mortgage and consider waiting until the value of your home increases again.

What has more costs? Fixed or variable interest rates?

Fixed rate loans often do not provide better deals in the long run.

  • Particularly if there are considerable exit fees, the refinancing costs could outweigh the benefits.
  • In order to see significant savings, the interest rate would need to be considerably lower.

When replacing a variable rate loan, it is often easier to actually save money when refinancing. This is because with a variable rate, the interest rate, and thereby your mortgage payments, will fluctuate. Some homeowners choose to refinance simply to take advantage of lower rates when the standard rate falls. The money that is saved within a year, if it is enough of a change in interest rates, could easily offset the financing costs involved.
The rates on variable loans are based on current market values, meaning that the interest rate could be lowered considerably when refinancing.

What should I consider before refinancing?

Even when some lenders have lowered their interest rates on new home loans, it is not guaranteed that they all will have done so. This includes the lender from which you currently have your loan. This is why it is recommended that you check with other lenders to determine what kind of deals and financing costs might be available.

Before signing the papers on a new mortgage, you need to know:

  • All the fees and refinancing costs involved
  • The total cost of the mortgage over the entire course of the loan

These are the figures and refinancing costs you need to calculate in order to understand whether or not you are getting a good deal.
While refinancing is often a promising option, you need to be aware of refinancing costs when thinking about getting a new mortgage. The fees may be excessive in some cases, but they can be avoided if you are careful, do your homework, be sure to search and compare home loans, and are clear on all your expenses and total costs.

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