Beware Cost of Borrowing When You Refinance Your Household Loan
Beware of predatory lenders and high interest rates when you’re looking to refinance your household loan. It’s also important to compare the costs of refinancing to those of your existing loan. This article explains the cost-effectiveness of refinancing versus taking out an adjustable-rate mortgage.
Beware of high interest rates
When you’re looking for refinancing options, you should be careful about the costs. The closing costs of refinancing may be as high as 3% of the principal amount. These fees can take years to recoup. You also need to be careful when searching for “no-closing-cost” refinancings. The bank that doesn’t charge closing costs may charge you a higher interest rate, which could make your payments much higher.
Beware of adjustable-rate loans
When you’re considering refinancing your household loan, you should be aware of the interest rate structure. Fixed-rate loans typically have higher interest rates than adjustable-rate loans. But in the first few years, their interest rates are often fixed. This can help you budget your expenses and give you peace of mind, knowing that your payments will not increase even if market interest rates fall.
Beware of predatory lenders
The best way to save money on a refinance is to shop around for the best rate. However, you should be wary of predatory lenders who can try to trick you into taking out a sub-prime loan. Such loans are more expensive and come with unfair penalties. In addition, many predatory lenders are very good at convincing borrowers that their credit rating is poor. This isn’t necessarily the case. Reputable sources say that up to 50% of all borrowers with sub-prime loans actually qualify for more favorable terms.
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Be wary of predatory lenders who use aggressive sales tactics to lure homeowners into a high-cost loan. These lenders may not even let you make a prepayment penalty if you choose to refinance your loan at a later date. Also, be wary of lenders who offer loans with balloon payments at the end of the term, which catch borrowers off guard. They must also include a truth-in-lending statement, which explains the interest rate and fees associated with the loan.
Another warning is that many loan contracts include mandatory arbitration clauses. This can limit your legal rights later. Some loan contracts also require you to pay a fee to arbitrate disputes with your lender. Those fees can add up to hundreds of dollars. Furthermore, predatory lenders may even have a clause that locks you into an unavoidable high-interest loan.
Compare costs of refinancing with those of existing loans
Before deciding to refinance, it’s important to understand the costs involved. It is possible to save thousands of dollars by shopping around. Typically, refinancing involves paying for an appraisal, title search, and application fees. The primary benefit of refinancing is to obtain a lower interest rate. It can also shorten the term of a mortgage, reducing the amount of interest you pay each month. Depending on interest rates and how long you plan to stay in your home, switching to a fixed-rate mortgage may make more sense.
However, the costs of refinancing must be balanced against the benefits. While you may end up saving hundreds of dollars each month with a lower interest rate, your savings may not be enough to justify the extra costs. Performing a break-even analysis will help you decide if refinancing is worth it.
Besides the interest rate, you should consider the loan-to-value ratio. Different lenders have different minimum equity requirements, and you may have to pay mortgage insurance if you have less than 20% equity in your home. Depending on your lender, you can also pay points to reduce your interest rate. If you are able to pay points, you may be able to negotiate a bigger reduction in interest rate.
Refinancing fees vary from state to state and lender to lender. The Consumer’s Guide to Settlement Costs contains information on these fees. Ask your lender to send you settlement costs at least a day before closing so you can review them and make sure they are acceptable. Refinancing fees also include an application fee, which covers the cost of processing your loan and checking your credit.
Beware of refinancing scams
If you want to refinance your house loan, make sure you shop around. Some unscrupulous lenders are willing to overcharge you, using grandiose financial promises or refusing to disclose relevant information. The federal Truth in Lending Act protects borrowers from predatory lenders, and guarantees a three-day back-out period after closing. If you’re facing foreclosure, be especially careful of scams. Claims of “rescue” can be a disguise for high fees, and false help can put you in dire circumstances.
Mortgage scams affect borrowers of all backgrounds and economic situations. As the housing crisis continues to cause financial hardships for homeowners nationwide, be cautious of unscrupulous lenders. Many of these companies pose as foreclosure prevention groups, offering hefty promises and performing light paperwork. The goal of these scammers is to drain you of your equity and steal your house.
Often, these scams take advantage of homeowners who are unsure of how to refinance their mortgage. They promise lower monthly payments and lower overall cost of borrowing, but these tricks are designed to drain your equity. In most cases, you can avoid being ripped off by comparing multiple quotes from multiple lenders.
Legitimate mortgage refinancing companies are available, but beware of scams. Those posing as lenders or mortgage brokers present you with fake mortgage documents. The “loan” documents they present are actually deed transfers. Many scammers depend on the fact that most homeowners don’t read their mortgage paperwork. In some cases, victims don’t realize they’re even losing their home until they get an eviction notice.
A common scam involves an advance-fee loan. Scammers may use the internet, the telephone, or newspaper to lure people into paying an advance fee. This scam will request personal financial information, such as banking and credit cards. They will claim to need this information for insurance, collateral, or fees. Legitimate financial institutions may charge an application fee, appraisal fee, and credit report fee.
Refinance Your Household Loan – Final Thoughts
There are many reasons to refinance your household loan, including to lower the interest rate, reduce the loan term, convert an adjustable-rate mortgage to a fixed-rate mortgage, obtain cash for household improvements, finance a large purchase, or consolidate debt. Before you refinance, make sure you understand what you’re getting into.
