While refinancing a mortgage can offer a lower monthly payment and save money, there are also mistakes and traps to be avoided. Mistakes that could cost not only thousands of dollars, but could ultimately result in foreclosure if the homeowner is not careful. Continue reading to learn what a borrower needs to be aware of and avoid when considering refinancing a home loan.
Be Aware Of The Pre-Payment Penalty
Borrowers need to be aware that some mortgage companies may include pre-payment penalties in the loan contract. Offered as a clause in the contract, they may require a penalty payment if the property is refinanced or sold prior to a specified date. While most lenders do not insert penalties for pre-payment in the contract, there are some less than reputable lenders who impose excessive penalties – sometimes as high as 85% or six months of interest on the original balance of the loan. It is important to learn what penalties may be in the contract prior to signing.
Never Agree To Arbitration
Another clause that may be in the contract is the Arbitration clause. Arbitration allows for a third party to be brought in to resolve disputes the borrower may have with the lender. The law allows protection and rights be granted to the homeowner, but by agreeing to an arbitrator, much of that if forfeited. It is best not to agree to arbitration, as it could prove to be a costly error later on.
Be Careful Of High Interest Rates
Homeowners can often be misled by less than reputable mortgage lenders who attempt to lure those with good credit into accepting bad loans. The purpose is to charge high fees and rates for the loan and thus make more money. The best way for a homeowner to get a fair interest rate with their credit, is to compare lenders. Comparing the mortgage rates for several lenders makes it easier to see which ones should be avoided.