If you are in the process of refinancing your mortgage you need to do your homework to avoid overpaying for your new mortgage. Doing your homework means learning the basics of how a mortgage loan works. Here is a primer on basic mortgage terminology. Mortgage Lender Fees All mortgage loans have lender fees. Lender fees include application fees, credit report fees, and appraisal fees, survey fees, other processing fees, and closing costs. Mortgage lenders also like to hide fees in the fine print of their loan contracts. Make sure you carefully review the good faith estimate provided by the lender as this will include all fees along with the Annual Percentage Rate for the loan. Points Many lenders charge points for the privilege of borrowing. If you have good credit the lender should be paying you for the privilege of your business; however, this is not the way mortgages work. You can use points as a bargaining chip when negotiating with a lender. You should always get something in exchange for paying points. If the lender is requiring that you pay points in order to qualify, find a different lender. Mortgage Term Length The term length of your mortgage is simply the amount of time the lender grants you to pay back the loan. Mortgage term length largely determines your monthly payment amount and puts a dollar amount to the interest rate you are paying. Common term lengths include thirty years, fifteen years, ten years, and five years. The longer the term length you select, the lower your monthly payment will be. This is because repayment of the principal balance is spread out over a longer period of time. The monthly mortgage payment may be lower with a longer term; however, these loans are more expensive as you will pay more to the lender in interest over the life of the mortgage. Prepayment Penalty Make sure your new mortgage does not include a prepayment penalty. The average homeowner refinances their mortgage every four years. If you need to sell your home or refinance your mortgage that includes a prepayment penalty the lender could charge you up to six months worth of interest on 85% of the original loan balance. Do not accept a mortgage offer that includes this prepayment penalty. To learn more about shopping for the right mortgage and avoiding common homeowner mistakes, register for a free mortgage guidebook. |
