Loan Refinancing is becoming more and more popular as interest rates drop and governments worldwide make it more and more accessible. This has caused an avalanche of applications and a whole new finance industry sector seems to have appeared overnight offering all kinds of guarantees on your loan refinancing application.
How should you feel about loan refinancing and what dangers should you avoid? Loan refinancing can be a solution for people in the early years of a mortgage that negotiated a high interest (compared to the current low interest rates) and has a low prepayment penalty on their current mortgage. If you have the right circumstances you could make substantial savings on your current mortgage. You must understand however that it will take a little while for you to start saving money on your loan modification because you will need to pay for the loan modification costs. It is therefore not a good idea to take on a loan modification if you are planning to sell your house in the short term as you will probably sell the property before you have broken even on your loan modification expenses.
Beware of high loan modification fees.
Because loan modifications prey on the desperate and have become so popular in todayâ€™s crippled economy many unscrupulous characters and companies are taking advantage of people by charging outrageous fees without being able to guarantee any savings. These application fees can range anywhere between $100 to $1,000 and are non-refundable. In the best situations the companies really feel they cannot lose because they have been successful so often in the past, in the worst cases these fees are part of a scam as nobody can guarantee a loan modification will be successful.
The other type of fees we must keep an eye on are the fees banks and lending companies charge to modify your loan. There is no end of fees that can be charged, inspection fees, survey fees, application fees, title search fees and the list goes on and on. It is vital then that you do your homework and check the total cost of your loan modification. Lenders are required by law to detail all the costs in a good faith estimate, ask for it and study it carefully. It is important that you compare the costs of the loan modification against the savings you will make with a lower interest rate or other benefits the loan mod offers you.
Probably the most expensive fee you will have to pay and that you must pay special attention to is the prepayment penalty of your current loan.
This penalty is a clause lenders include in the loan contract that many of us borrowers are not even aware of. This penalty comes into play if you decide to pay for your loan early to save on interest payments or to change loan or mortgage providers. The fees can range from 1% of the capital paid to completely outrageous penalties. This penalty alone can make the loan modification uneconomic, a complete waste of time so it is a good idea to check your loanâ€™s penalty and consider negotiating a low penalty fee for your next loan.