If you are new to refinancing basics, doing your homework and researching a variety of mortgage lenders and brokers will help you avoid the majority of mistakes homeowners make with their loans. These mistakes often include choosing unfavorable loan terms, paying too high a mortgage interest rate, or agreeing to pay junk fees.
Refinancing Basics: Avoid Unfavorable Loan Terms
Unfavorable mortgage terms include loan prepayment penalties, balloon payments, and periodic refinancing requirements. Prepayment penalties are a fee charged by many lenders if you sell your home or refinance the loan. This penalty can be quite excessive; many lenders charge as much as six months worth of mortgage interest. If you have good credit there is no reason to accept a mortgage that includes a prepayment penalty. Otherwise, try negotiating with your loan representative to have the penalty removed from your loan contract.
Predatory mortgage lenders often structure their loan contracts to take advantage of their borrowers. Abusive lenders do this with balloon payments and periodic refinancing requirements. Balloon payments require the remaining loan balance due at a time specified in your loan contract. If you are unable to make the balloon payment you will have to refinance the loan or sell your home. Similar to balloon payments, periodic refinancing requirements force homeowners to take out a new mortgage or sell their homes at date specified in the loan contracts.
Refinancing Basics: Avoid Paying too Much for Your Mortgage Rate
Mortgage companies and brokers frequently mark up mortgage interest rates to boost their profit margins. The do this because the wholesale lender they represent pays them a bonus for marking up your mortgage rate. When a lender approves your mortgage application, you qualify for a specific interest rate. Your mortgage company or broker will mark that rate up and provide you a written guarantee of the inflated interest rate.
How can you avoid paying retail markup of your mortgage interest rate?
Tell your loan representative that you will not pay the markup. Ask to see the rate lock from the wholesale lender and compare it to the mortgage lock your loan representative gave you. Any difference in these two interest rates is retail markup and you should refuse to pay it.
Refinancing Basics: Watch Out for Junk Fees
Request a copy of the Good Faith Estimate from each mortgage company you consider before submitting your application. Using the Good Faith Estimate to compare loan offers gives you more information to go by than the Annual Percentage Rate. If you find anything on your Good Faith Estimate that resembles an application fee, lock fee, or courier fee, these are junk fees you should not agree to pay. You can learn more refinancing basics with our free, six-part mortgage tutorial.
My name is Rob Regehr and I’m a personal finance writer with a chip on my shoulder for banks and brokers that take advantage of my friends and neighbors.
