3 mortgage refinancing mistakes to avoid

These financial faux pas could cost you a pretty penny

R Sivanithy

#1: Stretching out the loan and focusing only on the interest rate

If you started with a 30-year loan and refinance into a new 30-year plan, then you’re actually starting all over again.

Borrowers would logically only do this if they’re offered a lower interest rate because extending a mortgage like this at reduced interest has the attraction of smaller monthly payments.

However, the problem is that they could very well end up paying more in interest over the entire period so make sure to check your overall interest payments over the tenure of the new loan.

Tip: Shorter tenures usually mean you pay less in interest over the life of the loan.

#2: Not shopping around

Many borrowers typically go straight to their regular bank to refinance, partly because they assume that if they want better terms, it has to be with the existing lender.

It pays to check out the competition’s packages on top of what your current bank is offering because loans today may be more attractive than what was available years ago when you started.

A difference of a mere one-eighth or a quarter of a percentage point on your mortgage rate can mean a savings of tens of thousands of dollars over the life of your loan. Use one of the many online calculators to work out what your new obligations are — consider those by Property Guru or Money Sense — before deciding whether to switch or to stay.

Tip: Make sure you compare loans with similar terms.

#3: Not taking all costs into consideration

Make sure to check if there are any penalties to be paid for refinancing, such as legal fees and closing costs should you switch to another bank. This is usually applicable particularly during the “lock in’’ period, and could set you back.

For example, there is usually a penalty of 1.5 per cent of loan redeemed (the outstanding sum) if this is done during the “lock-in’’ period which is usually three years. So, if the sum outstanding is, say, $1.4 million, the penalty for switching would be $21,000. This may wipe out any perceived advantage from refinancing. So you need to factor these into your calculations.

Tip: The best time to refinance is three or four months before the lock-in expires, since banks require three months’ notice.