Oh, the joys of being a home owner. You finally get that great fixed rate 30 year mortgage at 8.5% and 2 years later...Interest rates plummet. Mortgages are now going for 5.25% and suddenly your 8.5% rate doesn't look so good.

Welcome to refinancing hell.

While the above may seem like an open and shut case of "do it or you're nuts not to" it isn't always that simple. There's a ton of fine print, traps, hidden costs and the mortgage itself. Sometimes refinancing makes sense and sometimes it can blow up in your face if you're not careful. When refinancing your mortgage you basically have 2 options. Either a fixed rate mortgage or a variable rate mortgage. In almost all cases the variable rate mortgage you can get at any given point in time will be lower than the fixed rate mortgage you can get at that same point in time.

But there are things you have to watch out for or you can get royally hosed. For starters, a variable rate mortgage is just that. Variable. Your 5.25% rate can quickly go up to the 8.5% rate you had when you first got your mortgage. Add to that the fact that you're now paying out your mortgage over a longer period of time, since refinancing sets your start date back to zero, you end up paying more money in the long run.

Then there are the traps that you have to look out for. One is exit and deferred establishment fees. This is a set amount equivalent to several months interest or a percentage of the original amount borrowed if you pay out the load early. Oh yes, early payment penalties can kill you. Establishment fees for new loans can be as much as $800 or more.

Then there are other costs like stamp duty, legal and property valuation costs that can be as much as $1000 or more.

Then there is the fine print of your variable rate. Some of these, which they call "teaser rates" only apply for a certain length of time and after that time passes the rate you pay can actually go up higher than the original rate you paid before refinancing.

Tthe thing that most people don't realize is that a refinancing is just like a financing. You have to close on the house again. You have to do a termite inspection and everything else you did on your first financing. That includes all the lawyer’s costs. Yes, he gets his piece of this pie as well.

The best way to get the most out of your refinancing is to follow these simple pieces of advice.

Get a discount broker. This is a great way of saving as much as $1000 on a $300,000 loan

Another thing you can do is tell your original lender the rate that you've been offered and give him a chance to match it.

Look for specials such as zero application fees with new loans.

Refinancing can be a great money saver or a royal pain in the backside that can blow up in your face. Make sure you read ALL the fine print. Make sure you know exactly how much you will save over the course of the loan compared to what you're paying with your current mortgage. Get a financial advisor if you have to. It could mean the difference between saving thousands or losing thousands.

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Michael Russell
Your Independent guide to Refinance
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