15 Tips that can save you Money on your Refinance or Home Equity Loan
• Your current lender may be able to provide you the best refinance option. If your payment record has been good, certain risk-control fees (such as the credit report, property appraisal, title search, etc.) may be waived in order to keep your business in-house.
• Conversely, your current lender also may not be your best choice. The truth is that most people continue to use their current lender strictly as a matter of convenience. There is a comfort level that’s been established because they’ve done business with this person or company before. Additionally, they don’t have to shop, compare, or make any decisions at all. The lender is acutely aware of this, and may therefore offer only marginal settlement cost benefits to deflect your attention away from the fact that your new loan’s rate or other terms aren’t very competitive with those of other lenders. If your inclination is to stay put, then they don’t need to compete too arduously; they only need to keep you from looking elsewhere. The point here is to diligently comparison-shop, because refinance and home equity products can vary considerably among lenders.
• Even if (actually, especially if) you have bad credit, don’t neglect to shop around. Most lenders today offer subprime programs, and many specialize in them. Furthermore, nearly all mortgage brokers work with subprime lenders; they may not, however, work with the right ones for you. One lender may readily make a loan that another one wouldn’t even consider doing. If a lender thinks that you don’t know that you have options, you may be offered higher rates and fees than need be.
• Review your credit before you even begin to shop for a refinance or home equity loan. This will afford you time to correct or repair inaccuracies or minor problems, which could possibly help to lower your new loan’s cost.
• If your current loan demands that you refinance at the end of a certain period (due to an upcoming balloon payment or rate adjustment, for instance), give yourself plenty of time. One of the worst things that you can do is to refinance under the pressure of time. It’s not unwise to begin shopping twelve- to eighteen months before you’ll actually need to have a new loan in place. This will give you the luxury of being able to walk away from a refinance deal if the lender surprises you with any last-minute changes. Sometimes, due to a simple lack of planning, people end up taking bad loans because they need the money quickly.
• Check your current loan for any signs of a prepayment penalty. Some lenders may waive the penalty if you refinance with them again. If your lender won’t, you may have to wait for the penalty term to expire. But let them know that, because of this, you’ll probably be taking your business elsewhere when the time comes.
• On the subject of prepayment penalties, don’t accept a new loan that has one. There are enough offerings out there that don’t include this clause. However, prepayment penalties may sometimes be offered by the lender in exchange for a lower interest rate. Depending on the length of the penalty period and the time that you expect to continue to live in the house, this option may be worth considering.
• Be aware that a “no closing cost” refinance loan comes with a price, which is usually a higher interest rate. The lender’s fees are simply wrapped into the loan. Prepayment penalties can sometimes also be included with this option, so be careful.
• Be sure that you allow enough time to close on your loan. Consider a rate lock if you think that interest rates may rise between the time your rate is quoted and the day of closing. Many lenders routinely offer 30- to 45-day locks. For home equities this should more than suffice, but refinances have been known to take longer. Having to pay a higher rate may defeat the purpose of refinancing in the first place.
• Refinance loans come in many flavors, including 15-, 20-, 30-, and now even 40-year terms. If a lower monthly payment is important, you might consider one of these longer-term loans. Of course, you’ll also need to weigh other factors, such as slower equity buildup, how long you plan to stay in the house after the refinance, etc.
• If you’re seeking a home equity loan and have decent credit, you shouldn’t have to pay any application or appraisal fees. If a lender tries to charge you for these, keep shopping. You won’t have much difficulty finding one that doesn’t. You may have to pay recording fees, but that’s a minimal expense.
• Avoid home equity loans which have a default penalty for being late or missing a payment. Similar to the clause now included with most credit cards, this penalty could raise your loan’s interest rate to alarming levels.
• Generally speaking, the term of your borrowing shouldn’t last longer than what you’ve purchased with the funds. For example, if you used the equity in your home to buy a new car, do all that you can to pay it off within three- to five years, and definitely before you trade for another vehicle.
• Keep a cushion of at least 20% equity in your home. If your combined loan-to-value ratio (your first mortgage plus the proposed home equity loan) exceeds 80%, you’ll pay higher interest rates on the HEL.
• Finally, as with any other product, your knowledge of what’s available can save you considerable amounts of money. Educate yourself about how refinance and home equity loans work. You’ll be in a much better position to find just the right program to meet your financial needs.
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