The Pitfalls of Refinancing

• Pitfalls in refinancing cause frustration among borrowers.Winston Davidian/Photodisc/Getty Images
  
  When borrowers refinance their home loans there are pitfalls they often wind up in. There are several issues to investigate before refinancing to avoid this. Borrowers choose to refinance for many reasons including accessing equity that is in the home or for reducing their monthly payments. Often refinancing is a good option for borrowers, but borrowers should be aware of possible pitfalls.
  
  

Interest Rate

• Many borrowers look at only the interest rate of the new loan and fail to consider all other conditions of the loan. The interest rate of the loan is vital, but there are other factors to consider. The APR, annual percentage rate, is often different from the actual rate. This is a key factor that is not always explained thoroughly by the lender. An actual interest rate is often a lot higher than the APR.
  
  

Closing Costs

• All refinance loans come with closing costs. Closing costs vary by lender but lenders often try throwing in fraudulent or excessive charges. A Good Faith Statement is a statement lenders supply to borrowers within three days after making the loan application. An origination fee and loan processing fee are two valid charges that should appear on this statement. If there are charges a borrower is unsure of, the lender should be asked to explain them. Closing costs are a vital part of a refinance. Borrowers should look at the complete cost of the loan prior to refinancing. This includes the amount of loan and all charges and fees. A lender discloses this amount along with monthly payment amount and length of loan. Borrowers should examine this information thoroughly. Lenders often extend loan periods to decrease payment amounts. Borrowers may not notice this at first.
  
  

Other Issues

• Borrowers should investigate the lending company they are using. By checking with the Better Business Bureau, key information can be disclosed. Borrowers find out whether the lender has a good record or not. This often helps borrowers avoid refinancing through fraudulent companies. A prepayment penalty clause is a common pitfall borrowers fall into. This clause charges a borrower a steep fee if the loan is paid off early. Borrowers often fail to notice this clause and they refinance before the prepayment penalty period ends and incur a large fee. Arbitration clauses are another pitfall to avoid. These clauses allow a third party to step in and help resolve issues a borrower has with the lender. Many times the arbitrator is assigned by the lender giving interest to the lender. This forfeits fair rights for the borrower.