By Justin Hunter
Refinancing your mortgage
can save you hundreds of dollars on your monthly payments or thousands
of dollars on your overall premium. But like with any mortgage loan,
predatory lending does exist, especially with refinancing because the
borrower often assumes what the lender is telling them is correct since
they already have gone through the mortgage process once with no problems.
While encountering a predatory lender is rare, you want to be educated
enough to know when you come across one. The article, “Beware
of Mortgage Refinancing Traps” posted on e-z-mortgage-refinancing.com,
provides a warning signs to be aware of when dealing with a lender refinancing
your mortgage.
Other than the obvious initial trap of falling for “special introductory
rates” that are not legally possible and waived fees, there are
common things that you should be aware of when
refinancing.
The first thing that should raise a red flag is the mention of a prepayment
penalty.
“For many years prepayment penalties all but disappeared from
the mortgage lending scene. Unfortunately, they are making a comeback.
Usually prepayment penalties are inserted into the loan documents by
the lender to get additional profit. This is especially true if you
have a below market interest rate.”
The money the lender is losing out on from a lower interest rate will
be made up in your prepayment penalty that will occur when you pay the
loan off early from the day you sign until the last payment, which could
be 30 years later.
The next trap is to be offered initial low interest rates with subsequent
above-market rates thereafter.
“Credit card companies are notorious for this offer, and their
mortgage lending cousins have in recent years begun to use the same
trick. Let's say that your mortgage
rate is tied to an interest rate index such as the 10 year Treasury
note. The prevailing national rate for a 30 year mortgage might be 2%
above this index. To attract borrowers, the lender might advertise an
interest rate that is equal to or less than the current rate on the
10 year Treasury note. When you examine the fine print, you'll discover
that this low introductory rate only is valid for the first 6 or 12
months of the loan, at which point the interest rate would immediately
change to the rate on the 10 year Treasury note plus 3%.”
The kicker with this trap is that a lender who can sell this type of
refinancing loan to you will figure you will buy anything, thus a prepayment
clause is added. The result: you are stuck.
The last trap is not always a trap because many lenders explain what
it is; negative amortization.
“Have you seen a mortgage refinancing advertisement offering incredibly
low payments? Do you wonder how any lender can offer payments of under
$500 per month on a loan in excess of $200,000? The answer is negative
amortization. This occurs when the monthly payment isn't sufficient
to pay the entire interest payment each month. The unpaid interest gets
added to outstanding loan balance each month, and the result is that
the outstanding balance on your loan increases each month, rather than
the standard decline.”
Negative amortization has a terrible name but you can actually turn
it into a positive depending on how you look at it.
You will probably end up paying much more than anticipated at the end
of the life of the loan, but financing
that house may not have been possible without negative amortization
because it provided you a low monthly payment that would not have been
possible with a traditional mortgage rate.
While nontraditional options are sometimes beneficial, you are best
advised to play it safe and refinance with a lower fixed-rate
mortgage so that you know what to expect each month and in the future.