Beware: Refinance Traps
Essential Reading: The top 5 refinancing traps.Set up costs
Ask if there are any establishment fees involved in setting up the new loan. These fees can range from $400 to $800. It pays to search out the special offers such as zero application fees on new loans. Most loans do come with set up fees, however you can sometimes negotiate for these to be reduced or waived altogether if you put forward a good case or the lender really wants your business.
Exit Fees
Find out about any exit fees that might apply if you choose to pay out your existing loan early. Changing loans basically means you are not standing by your end of the contract, so the lender will charge a fee for you to leave the loan. Some lenders will charge a set amount or a percentage of the original amount borrowed, so don't underestimate this expense. If the set up costs along with the exit fees are high, any savings from refinancing wille be reduced or lost all together.
Initial Low Interest Rate
Some lenders might advertise an interest rate that is equal to or less than the current standard rate in order to attract borrowers. When you read the fine print, you'll discover that this low introductory rate only is valid for the first 6 or 12 months of the loan. After this time, your interest rate will rise, and this can often rise higher than a standard variable rate so be careful to check the comparison rate once the 'honeymoon' period ends.
Extra Repayments
Check to see that you will not be charged a fee for extra repayments. Some loans may limit the amount you can pay off. The more basic your home loan, the less likely you are to have features that allow this. Many fixed home loans and "no frills" home loans will penalise you for making early repayments so ensure you look at your conditions on the loan.
Forgotten Costs
See what other costs apply, for example, stamp duty, legal and property valuation and mortgage insurance if you need to borrow more than 80 percent of the property's value. There can be a lot of hidden costs, or charges that you simply forget to factor into your budget and this can be a costly mistake.
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