Whenever interest rates drop or housing values jump, a refinancing frenzy follows. Whether you are looking to trim your mortgage payments, eliminate credit card debt or renovate, experts say you should fully understand all the options available to you before deciding to refinance. Here are some common pitfalls that consumers can avoid when refinancing:
1. Check interest rates to see if your new rate will pay off the penalty for leaving your present mortgage. It is best to decrease your interest rate by at least .75% to 1%. This would save you $100.00 a month on a $150,000 mortgage.
2. Know what your costs are – Check with your bank to find out what the penalty would be for an early payout.. It may be 3 month’s interest or more.. Don’t tell them you are moving your mortgage or they will pass you on to a high pressure salesperson who will try to talk you into coming into the branch to discuss the issue. It’s easier to say you are thinking about paying out your mortgage early.
3. Be sure to compare apples to apples- Make certain the rate you were quoted over the telephone was for a similar product. Comparing 3 year rates at one lender to 5 year rates at another is like comparing apples to oranges.
4. Overvaluing your Home – pride of ownership sometimes overshadows our common sense. You may expect the value of renovations to be equal to the cost of labour and materials. While return on investment for new carpeting or new paint jobs is close to 100%, it can be as low as 15% for a granite entrance-way. Some people use their tax evaluations which may be too high or too low. Consider checking with your Realtor or someone who recently sold their home on your street.
5. Not considering future plans – getting locked into a 10 year fixed rate when your kids will be leaving for college in 3-5 years may not be a smart move. If you are planning on buying a vacation home or an investment property why not plan for it now? You might be able to get it sooner than you expect.
6 Don’t let low interest rates or catchy slogans stop you from shopping around. Often the lower rates come with unattractive conditions: they may not be portable to a new home, the interest rate may only be available in one province, or you may be tied to the mortgage unless you have a bonafide sale of the home.
7 Finally don’t go to your present bank first. If you don’t know the rates you won’t get the best rate. The major reason people go to their present lender is convenience. There is comfort in “being known” and a belief that they should receive special treatment. The reality is that all lenders are under pressure trying to process the unprecedented volume of refinances. They have to set priorities. And you would be a low one as they already have your loan. They may lower your present rate from 3.99% to 3.79% to pacify you but if you shopped around you might find that other lenders are offering 3.19% at this time.
In conclusion, be a good consumer. Consult with your Dominion Lending Centres mortgage professional who can review the best options with you. We can help you make an informed decision on your finances.
Thanks to my DLC colleague David Cooke for this article.