Protect Your Investment – Refinance with Knowledge

Choose Your Lender Wisely
It is best to have references from a trusted source. Be suspicious of anyone who offers you bargain loans. Do not believe in deals that are only good for a short time. Although it may appear very attractive to borrow against your property, be warned that predatory loans provide temporary cash, but can make it harder to keep up your mortgage payments over time. Protect yourself by asking for your total costs in writing. This is your LEGAL RIGHT. Total costs include: the annual percentage rate; monthly payments; length of time to pay back the loan. Ask the lender to explain all fees and points.

Be cautious before signing on with a balloon, interest-only, or adjustable rate loan. Balloon loans may include an unreasonably high payment at the end or middle of the term. Later, when interest rates may be unfavorable, you may be forced to refinance when your monthly payment becomes difficult to manage. Interest-only loans may initially reduce monthly costs. Although the lower payment is more manageable, you build no equity in the property, outside of real estate appreciation. Each monthly payment you make does nothing to reduce the principle on the loan. Adjustable rate mortgages are a group of loans whose characteristics vary, depending on the terms of the loan, so know how often the rates adjust. Some ARMs only adjust upward—increasing the interest rate as often as every six months! Other ARMs may allow you to maintain the initial payment amount when interest rates increase, but the difference is then added to the principle balance of the loan. All of these loans can leave you with more debt than you expected.

The following are practices that may be used by predatory lenders.

• Excessive fees - Fair, competitive loans charge fees of around 1% of the loan. It can seem a win-win situation to refinance without having to bring cash to the table. Do not be lured to agree to additional fees, just because they will be wrapped into the cost of the loan. Make sure that fees do not total a high percentage (5% or more) of the loan.
• High prepayment penalties - You may find yourself locked into a loan that you are ready to refinance, because the terms include more than six months’ interest for prepayment.
• Push to refinance - If you refinance frequently to reduce your monthly payment, you pay fees to the lender and may increase the overall amount of the loan if the fees are financed into the mortgage. This can increase monthly payments and drain borrower equity.
• Bait and switch - A lender offers certain terms during the process of application, but presents worse terms at closing. Closing can be anxiety-provoking--do not feel pressured to sign if you suspect that terms have been changed.