Refinancing seems easy enough – get rid of an expensive loan for a cheaper one, and it’s all profits moving forward. Marketing makes it easy enough to understand and always make sense. However, there’s a complicated fee structure, and costs hidden behind the intent of helping borrowers that can reduce savings expectations or make refinansiering an overall money loss. Knowing about the potential costs upfront can save heartache down the line when finances ultimately don’t add up after all.
Existing Loan Early Repayment Fees
Many loans come with contracts that state that if borrowers pay off their balance early, they’re penalized. Lenders always assume they will have the loan for a certain term and they will have received all interest by then. However, when borrowers choose to refinance and pay everything off early, the lender misses out on future interest income. To avoid this, lenders have fees in place in case someone decides not to remain with them for the term of the loan.
Fees to repay loans early vary widely. Some lenders charge a percentage of the balance still owed, usually 1-3%, but sometimes more. For example, if 300,000 kr is remaining on a balance, that means 6,000 kr in penalties immediately if a 2% penalty applies (for 1 month and 2 months greater, respectively). Other lenders assess a fee of a few months of interest as the penalty; in this same example, paying three months’ interest works out to about 6,000 kr at 8%.
Fee assessments usually go down over time. A penalty may be 3% in year one, 2% in year two, and 1% in year three. After that, it makes sense to assess refinancing rights since if loans got better over time or financially different circumstances occurred, people should have the option to choose otherwise.
Not every loan has an early repayment penalty. However, the number is significant enough so that before planning on refinancing, it’s in borrowers’ best interests to assess their original loan documentation to see whether these fees apply and how much they’d be. This one single cost can wipe out all hypothetical refinancing savings from lower interest costs.
New Loan Established Fees
Establishing new loans comes with associated costs that lenders charge to initiate applications, verify information and set up accounts. Establishment fees (also called origination fees or processing fees) are usually anywhere from 1-5% of the loan amount. In a 300,000 kr refinance scenario, that’s immediately between 3,000-15,000 kr.
Low-interest lenders might compensate origination with higher establishment fees while others keep establishment fees modest with a higher interest option but a competitive interest rate. If borrowers aren’t paying attention to these costs apart from interest rates specifically, they’re losing sight of what’s truly the cheapest option from lender to lender.
Fees exist that vary from lender to lender and also, sometimes, based upon loan sizes. Higher amounts often have lower percentages but much higher dollar amounts. Some lenders waive establishment fees on promotional loans or good credit customers. Comparison shopping reveals significant differences from lender to lender and even within lenders themselves.
Plus, these fees most often come out of the loan amounts received; borrowers seldom receive full agreement loan values. Thus if someone intends to refinance a 300,000 kr existing loan, they’ll receive about 291,000 kr as what’s left after establishment fees. This hypothetical means borrowing 9,000 kr for something that’s gone immediately.
Appraisal/Valuation Fees
Secured loans (home loans, car loans) come with appraisal stipulations when refinancing since lenders need to ensure that the collateral value remains effectively the same for new lending purposes. Appraisals on property values generally cost between 3,000-8,000 kr depending on the area and property type when refinancing; vehicle appraisals maybe even cheaper but can also add up.
The appraisal is not guaranteed to be good news for borrowers either; property values may go down. If an expected appraisal comes in lower than that of the current market value or expected outcome, it’s at the lender’s discretion how much they are willing to lend for refinansiering purposes or if borrowers must pay in cash at closing.
Unsecured loans don’t encounter these appraisal costs since there is no collateral backing them. However, unsecured loans typically come with interest rates higher than secured loans due to the lack of collateral; sometimes the difference in rates outweighs what appraisal costs might incur up front.
Legal Fees/Titling Costs
Secured loans come with legal documents associated with refinansiering – new liens need registering and old ones discharged; titles need notes and removals need legal attention. Lawyer/title company professionals work on these issues and charge from their cities pros/cons for their services and labor rendered throughout the process.
These costs are variable by city and situation since not all loans get refinanced the same; standard legal services may cost differently than administrative gathering costs determined per lawyer’s needs. Sometimes it’s one price for everything requested. Other times detailed line-item lists assess higher costs over time – 500 kr here for this part and then 800 kr there.
While some fees might be negotiable (for example, between title companies or attorneys), others are not required unless regulated by law or government/mortgage companies require filings or assessments in a specific manner that charges standardized rates.
Break-Even Timeline
Every refinansiering comes with a break-even point where the savings exceed the total costs paid out over time until that point – for example, if it costs 25,000 kr to refinance through various assessments but saves 1,500 kr per month compared to previous loans then within 17 months it becomes worth it (about 1+ years). Thus if this is determined after one month where it’s been known all along the goal was to keep the refinanced mortgage for only 3 more months (3 years total), then that’s not fair.
Life circumstances change. Someone might plan on staying in their refinansiering mortgage for ten years but get transferred across the country within 3 years. If someone assessed a hypothetical break-even point of four years but only settled for three years, then they lost money compared to what should have happened had they just kept their previous loan.
Break-even is assessed by adding all upfront costs and dividing them by monthly savings. This gives months until break-even that should then be compared against how long the loan will likely be kept in reality. Honesty about this projection maintains financially sound decisions that appear decent yet fail to materialize once reality kicks in later on down the line. If someone wants to investigate their rights on whether they should refinance (refinansiering) then they need to understand beforehand how long these decisions will go to avoid mistakes that’ll cost more than any hypothetical interest rate savings.
Lost Benefits/Features
Original loans come with cost-benefit aspects that might not carry over into refinansiering loans. Payment holidays during financial struggle, variable loan interest rate caps that allow flexibility or loyalty programs from tenured patronage can all disappear with a new lender outside of these arenas.
For example, some mortgages allow for temporarily lowered payments or delayed payments when hardship strikes; refinancing into a set low-payment mortgage means losing that benefit – and if financial hardships strike later – and those benefits meant receiving them was better than getting lower payments from refinancing.
Loyalty programs resuming after years means that someone who’s five years into a loan where rates drop after seven years must revamp their hard-won progress because their current rates are slight better than where they previously agreed but could temporarily become better as time progresses down the road; equity must also be considered when generating cost-benefits going down this path.
Credit Impact
Refinancing implications exist on credit factors – the credit inquiries represent hard searches on one’s credit score – and while some inquiries may equate to lower scores across various transactions (potentially dropping by only a point or two each), more inquiries exacerbate negative impacts.
The new loan resets average account age – older accounts factor into credit scores because they show longevity of history; replacing accounts with newer options drops average age marginally as well for average account holders since they’re rankled by hours-in instead of hours-at credit agencies.
Insurance/Protection Product Costs
New loans often come with optional (if not mandatory) protection products – payment protection insurance/life insurance tied into lending transactions/property insurance stipulations – but these create new ongoing costs that lessened or didn’t apply at all during original loans.
Lenders might bundle insurance products when refinancing but then it’s hard to determine true cost-benefit analysis unless otherwise agreed upon. A loan that offers wildly low-interest rates has potentially expensive insurance products down the line – but this means totals show inflated costs that failed to impress upon entry unless hidden in fine print so mortgagee can’t truly question less-than-stellar value changes thanks to transparent reading through secretive offerings later on through verification.
When Costs Outweigh Benefits
Slight interest improvements are rarely worth refinancing Costs – not taking current details into assessment; dropping interest rates from 6% to 5.5% mean minimal monthly savings which means reduced up-front expenses each month compared to down payment over time at a break even point that isn’t sustainable in reality – generally improvements of at least 1-2 points are worth talking about (but again this depends on loan size/remain time period).
Loans with shorter remaining terms do not benefit either – over two years left in loans mean limited experiences where refinancing costs can be paid back through lower monthly payments – the break-even point may be 18 months giving only six months equity on actual savings gained.
Stupid ways to refinance are when borrowers add up all potential costs – penalties/fees/appraisals/legal charges/hidden assessments – and compare them against substantial savings realistic over time less than assumed offer substantial bargains that needn’t be passed up because reduced interest rate means nothing if banked it through ridiculous alternate methods wrongfully assuming cheap refinancing was possible and beneficial.
Sometimes it’s just as logical to stay within current loans albeit higher rates if overall averaged considered since refinancing could be attractive at first based upon certain conditions – and sometimes it’s insane not to consider since recovery from extensive refinancing costs occurs quickly through legitimate savings need consideration greater than ignoring strictly numbers provided without reading beyond interest numbers and assuming refinancing makes sense without delving deeper.
