Some companies advertise refinancing rates that may seem very attractive on the surface but that makes a lot of money for them in ‘below the radar’ costs. Of course we all know who will be ‘out of pocket’ from having to pay these costs! It may also be the case that you current lender has systems in place to lock you into your existing loan, making it very difficult for you to refinance without taking a substantial financial hit.

Here are some costs that you should look out for:

• Exit Fees: Many loan agreements have clauses which penalises the borrower for early payment. In the ‘worst’ cases this is defined as a percentage of the loan amount which can translate into a substantial expense.

• Establishment Fees: Some loan providers charge hefty fees for setting up new loans. In some cases these fees can, in the short term, seriously diminish the savings gained by refinancing.

• Other Costs: In some cases there may be legal and statutory costs involved in refinancing e.g. stamp duty, property valuation, mortgage insurance (for loans covering a substantial percentage of a property’s value) etc. Make sure that you find out what these costs are and how much it will amount to.

The above is not intended to put you off from refinancing. Far from it, there are some great deals out there and you could save a lot of money by switching lenders. The important thing, however, is to do your homework and to make sure that you are not so mesmerised by a seemingly good interest rate that you are blind to hidden costs that could cause you to pass up on a better overall deal.

It is no use finding a company with a good reputation and reasonable costs that you find impossible to work with. You should therefore make sure that the local branch of the institution (or their phone or web support service) is able to offer excellent levels of customer service.

Bad customer service can add a lot of unnecessary stress to the whole experience of refinancing. It can, of course, also add costs as you use up your precious time trying to communicate with the company. Some of the things that you should look out for are:

• Companies treating customers with courtesy and respect: If you as a prospective customer feel that you are just a number to a company then the situation is unlikely to improve after you have actually taken out a loan with them. If your initial impressions are negative you should therefore perhaps keep looking.

• Companies that are approachable and responsive: Very few things is as frustrating as having to being kept on hold for ages or waiting days for a response to an email. You should therefore, again, use your initial experiences in communicating with the company as a barometer of how things will be after you have ‘singed on the dotted line’.

• Companies  not engaging in ‘high pressure’ sales tactics: If you feel that a company is placing undue pressure on you to sign a contract as soon as possible, or if you are in any other way uncomfortable with the way in which you are treated, you should walk away as soon as possible. Companies who regularly use ‘hard sell’, or even unethical, sales techniques are unlikely to be ideal in terms of forming long term business relationships with.

The bottom line is that refinancing your loan is likely to be extremely important to you. You should therefore entrust your business to a company that treats you with a great deal of seriousness and respect.

The next step after doing ‘due diligence’ on different providers is to ask the companies that you are interested in to give you a full breakdown of all their costs and fees. Most companies will have no problem whatsoever with providing this. If, however, a company stalls and acts evasively this should of course set the alarm bells ringing right away!

Having a full list of fees and charges in front of you will help you to avoid the trap of not looking further than a relatively low interest rate. The fact is that high rates and charges can very easily wipe out savings generated by lower rates if you are not careful. You should therefore keep a make sure that, in addition to interest rates, you also compare all the different costs associated with setting up and servicing the new loan agreement.

Some of the costs that are very often ‘loaded’ in favour of the lender are document preparation fees, legal fees, survey fees, miscellaneous ‘closing costs’ etc.

Another cost, that may perhaps not be immediately relevant but that should certainly be researched, is the kind of early payment penalties that a company charges. It is sometimes part of the strategy of some companies to offer enticing initial packages as a prelude to using high early repayment penalties as a means of ‘locking in’ borrowers for a number of years.

In the end having a full picture of the short and long term financial implications of all possible deals will be your best protection against merely responding to the hype generated by an excellent marketing campaign. You should therefore make sure that you diligently ‘crunch the numbers’ before putting pen to paper.

There are a lot ‘fly by night’ operators in the financial services sector and people sometimes get burned quite badly through doing business with them. You should therefore make sure that the company that you eventually go with has an excellent track record of providing good deals coupled with excellent service.

There are several ways in which you can do this:

• Look up the Company’s entry on the Better Business Review website: This will tell you how long they have been in business and will also flag up any issues that there might be in terms of misleading marketing, product delivery and customer service.

• Do a search of consumer protection websites: There are several organisations dedicated to consumer protection. Their websites are often the first places where potential problems with companies and institutions are discussed. Do an internet search to find the name, and website, for consumer watchdogs operating in your local area.

• Monitor media reports: If a company is not delivering on its promises (and perhaps even if it exceeds expectations) the story is bound to end up in a media report somewhere. A simple Google search using a company name will often be enough so unearth such archived media reports.

• Pay attention to ‘word of mouth’: People who had bad (and good!) experiences with services providers tend to talk about it. You should therefore try to gauge the opinions of people who have done business with any providers you are considering in the past. If it is difficult to do so ‘in person’ it might be a good idea to check out one of the many online forums where financial products are discussed by end users.

I am not suggesting that you should become a modern-day Sherlock Holmes and investigate every company that you are thinking of dealing with down to the last paper clip. I am suggesting however that just doing a little bit of homework can save you a great deal of trouble later on!

It is also speculated that home loans will be the next big frontier for peer to peer lending (currently most loans are personal loans and therefore relatively small) with some services already taking small steps in that direction. In this model a home loan would be split into several parts, each funded by a different lender. The peer to peer service will then act as a central point, paying over the loan and making sure that every lender get his/her money at the end of the month.

On paper peer to peer home loans may seem like an attractive proposition. You may get lower rates and avoid the banks altogether (possibly a bit of an incentive for some!). There is, however, several good reasons why I believe that you should, at the moment at least, steer clear of the tentative peer to peer home loan experiments that are currently popping up all over the internet:

• For most of us taking out a home loan will be the biggest financial commitment that we will ever make. Entrusting it to services that are basically totally ignorant of offering financial services at this level (facilitating small scale personal loans is one thing, home loans worth hundreds of thousands of dollars quite another!) may perhaps be a risk too far.

• There is a huge question about how the activities of peer to peer networks should be interpreted by regulatory bodies like the Securities and Exchange Commission (SEC). On the one hand peer to peer networks are demonstrably not banks since their core business is ‘facilitating’, rather than giving, loans. On the other hand, it can be argued that they perform certain ‘bank like’ functions (i.e. credit scoring, initiating legal financial agreements and acting as conduits for the flow of funds from one individual to another). This question has not been resolved yet and will almost certainly be tested in court over the next few years. I would, again, be very reluctant to place such an important transaction as a home loan with a system of uncertain legal status.

I am convinced that peer to peer lending has its place and it can also be shown that it has helped many people, who would perhaps have been refused by banks, obtain credit. I am just as convinced, however, that the sector will have to grow up a bit more before I would start recommending that people use it for taking out, or refinancing, home loans!

Before we look at three very basic tips for paying of your mortgage earlier we just need to briefly look at what you are actually paying when you pay your mortgage. This fact is that, at the beginning of the loan only a tiny percentage of your payment actually goes to pay of the capital amount of the loan, the majority of what you pay goes to serve the interest on the debt. Paying off just a little bit more means that the next month you will be paying slightly less interest and repay slightly more of the capital amount. This may not seem like a big deal but if you can consistently do this at the beginning of a loan term the results can be nothing short of phenomenal. I suggest you download a ‘Loan Amortisation Spreadsheet’ from the internet to see what the potential impact of even small extra amounts at the beginning of a loan term can be.

So how do you work on getting repaying a bit more of the capital? Here are three basic suggestions:

• Set up fortnightly payments. Most people pay their mortgages on a monthly basis. If however, you set up fortnightly payments you will be adding one extra payment per year while just following your regular payment cycle.

• Round off repayment amounts. Paying even a tiny bit more can have a significant effect over the life of a mortgage. One way of doing this would be to always round of your payments a bit (e.g. $1367 becomes $1400). This may seem like a sacrifice at first but you’ll be surprised how quickly even these, seemingly small, amounts add up.

• Pay lump sums into your mortgage. Most mortgage lenders would allow you to add extra funds, in the form of a lump sum, to your mortgage. This is a great way of reducing your loan term if you ever unexpectedly come into some extra money. In my opinion it makes much more sense to do this rather than to simply take out a fixed deposit since the amount that you will save on interest will almost certainly exceed the possible interest you can earn on a deposit.

These are just some of the ways in which you can save a lot of money later by saving a little. Remember: ‘Every little helps!’

Your credit score is simply an averaging out of various figures that have some bearing on your possible future ability/inclination to repay loans. These factors include things as diverse as having a fixed address to how many times you have applied for credit over a given period. The factors that can hurt your score the most are previous loan defaults or late payments.

A credit score is obviously a bit of a ‘blunt instrument’ as past performance is not necessarily an indication of future behaviour. There have, in fact, been a large number of cases where people built up excellent credit scores over a number of years simply to defraud banks of lots of money later on. (Talk about long term planning!) In spite of this credit scores will probably be with us for a long time since they are more or less the only alternative to lengthy personal interview every single time you apply for even the smallest amount of credit. Without them credit would also be much more expensive as banks would have to set up huge internal investigative divisions in order to vet every applicant.

You should, in light of the above, do everything in your power to make those three digits work for us rather than against you. But how do you do it, especially if you are in a hurry to refinance your loan? Three very basic starting points are listed below:

• Make sure you know what your credit reports contain. You are perfectly entitled to know what is in your credit report and how your score is calculated on the basis of the information it contains. You should therefore contact one of the credit reporting agencies directly, or consult on of online credit score checking services. Having the solid data in front of you will help you to develop a future plan action

• Challenge any errors and/or inaccuracies. There is no need to simply accept the contents of your report as ‘set in stone’. It may be that some debts may have been inaccurately reported as unpaid, or you may even have been the victim of identity fraud, where someone else obtained credit in your name. Whoever you requested the report from will advise you how to act in such cases. Challenging and correcting the contents of your report in this way can raise your score by several points in a relatively short period.

• Repair a bad report by doing the basics right. There is no easy way to say this but over the long term the most effective way to repair a bad credit report is to consistently maintain an excellent record of payments! It is possible that you will have to scrimp, save and sacrifice to do this but in the end the payoff will be excellent.

I realise that the points I raised, especially the last one, may seem easier said than done. However working to improve your credit score should be one of your top priorities as it may very well be your key to being able to refinance at a significantly better rate than what would otherwise have been possible.

Emergency refinancing can sometimes be a lifeline in efforts to prevent foreclosure. The first thing that needs to be said is that you should contact your bank as soon as you realise that you are going to run into trouble in terms of keeping up your payments. You may find this hard to believe but the bank would much rather work with you in preventing the loss of your home than work against you by starting foreclosure proceedings. This is not altogether due to selfless altruism on their part. The cold, hard, fact is that they would be taking much more of a hit by trying to sell a foreclosed property in the current market conditions than they would by coming to some kind of accommodation with you.

One of the things that your bank manager would likely suggest would be to restructure your mortgage or that you pursue other refinancing options. There are several ways in which this can help you. They include the following:

• If you are lucky enough to have some equity in the property you can look at ‘Cash Out Refinancing’ This option allows you to withdraw some cash from the property and repay any arrears on the mortgage in the form of a lump sum.

• It could perhaps be the case that the bank would be willing refinance the loan, and move you to a better interest deal than the one that you are currently paying. This perhaps not very common in cases where borrowers are facing financial difficulties but some lenders would go to great lengths to prevent yet another property going to auction.

• If you can just about meet your outgoings at the moment but you realise that you are going to run into trouble in the near future, refinancing can be a way of proactively preventing a major crisis. You can do this by using refinancing as a form of debt consolidation by refinancing the property for a large enough amount to repay the balance on your mortgage as well as any other unsecured personal debt that you may have (e.g. store cards, credit cards, personal loans). These kinds of debt often attract very high interest rates and by ‘bundling’ all your debt into your mortgage (where you will be paying a lower rate of interest) can significantly reduce your monthly spending on credit.

It is perhaps never a good thing to feel that you are forced to do something. However, emergency refinancing can sometimes mean the difference between losing and keeping your home. You should therefore ensure that you do not discount it as an option from the start.

One obvious way in which banks are trying to stay afloat is through being much more circumspect in terms of who lend to as this is a means to protect their ‘books’ from further liabilities (not that it does anything for the massive liabilities already on their books of course). If you have a low credit score you’ve probably long since cottoned on to the reality that it is becoming ever more difficult to obtain credit (although not impossible, more on that in a later post) and that the credit you are being offered is quite expensive.

Another way that banks are trying to cope is by returning to some of the fundamentals of extending credit (talk about shutting the door after the horse have bolted!) by diligently trying to court ‘good’ customers (i.e. people with excellent credit histories). This means that a lot of the current marketing frenzy has more to do with some of the banks needing help (“Come over and help us to shore up our flagging fortunes!”) than with them really offering best value.

It could be of course that you are particularly altruistic and ready to help, if that is the case you are more than welcome to just respond to the first heartfelt appeal! I suspect however that most of us would prefer to make decisions on the basis of what is best for us and for the banks to sort out their own mess. I want to reiterate therefore what I have said many times on this blog. Make sure that you do your homework before taking the plunge. There are indeed some excellent deals out there on the market but you may have to search around for them a bit (this blog is of course a good place to start!).

I suppose all of the above illustrate again what I meant with the title of this blog. Refinancing is sometimes a great idea, but is has to be done in the right way. And by that I mean right for you and not necessarily only for the bank!

The reason behind this bit of research is that it may just be the case that you will be so heavily penalised for changing your mortgage that it would perhaps not be worth your while. Mortgage lenders are of course aware of the fact that they will lose a tidy sum of money if you switch providers and they therefore sometimes build mechanisms, to make you think twice about leaving them, into their products.

You should, in light of this, scrutinise your current mortgage documents to see if they include mention of any kind of pre-payment penalty or any kind of early payoff fees. Pre-payment penalties were basically designed to lock you into a specific mortgage product for a certain period as it penalises you for paying of a loan before a certain date. Most pre-payment penalties will disappear after about five years. If you had your mortgage for longer than this then you should perhaps not be too worried. If you have been paying off your current mortgage for shorter than five year you should certainly investigate.

The pre-payment penalty amount that mortgage lender charge varies a great deal. You should however (if your current mortgage deal includes these penalties) expect to pay, on average, an amount roughly equivalent to six months’ mortgage interest. This is clearly a significant amount and you will have to do thoroughly crunch the numbers in order to calculate whether refinancing would be a good idea, even with the penalty. In some cases having to pay a penalty could mean that you have to wait a bit, until enough time has passed for the penalties to be dropped. Having to pay a penalty should however not be seen as the last word on any refinancing deal. If you have been offered a particularly bad initial deal it may still be worth your while to move your business elsewhere. As with so many things in personal finance it comes down to your own particular circumstances and I urge you to seriously investigate what would be best for you.