Question and Answers on Home Mortgage Refinancing

Q: Are there prepayment penalties?

A: Prepayment penalties exist and they can certainly be a burden. My cousin Michael was planning on selling his home and paying off his 5/1 adjustable rate mortgage since he was no longer paying at the initial lower fixed rate. He asked me the terms of a typical prepayment agreement on a home loan, and how much it would cost him to pay off his debt. My answer was, "It depends." There are both hard and soft prepayment penalties. Hard penalties are those that are charged when refinancing, selling, or just prepaying a significant amount of the loan. Soft penalties usually only get you when refinancing. Unfortunately, his particular loan had a very strict prepayment policy and Michael got hit with some large costs.

So, while Michael had made the right decision to take out a 5/1 adjustable rate mortgage. He didn't ask the right questions to his lender, who took advantage and didn't inform him of this potential burden. Always, be sure to ask about prepayment penalties so that that you can prepare accordingly.

Q: Will my credit affect my refinance options?

A: When I was refinancing my student loans, the first bit of advice I received from my friend Sally was to get my credit checked to make sure that I would be able to refinance. Sure enough, I found out I had a very poor credit score and that refinancing would cost me a lot more in backend fees. Sally advised me to look over my ratings to see if there were any errors. She was right, according to the report, someone with a similar name as me had missed a payment and it was recorded under my credit score. Fortunately, I was able to have this corrected and was able to get a much better refinance rate thanks to an improved credit rating.

Q: I want to refinance. Should I consult my current mortgage lender?

A: The way to receive the best deal when refinancing is to find out what other lenders are offering. Once you find the best refinance package available for your needs then you should go back to your original lender and express your interest in refinancing. By putting him or her on the spot, it is possible that a better deal will be offered and prepayment costs might even be discounted. The problem is that many mortgage investors have their interests in a large pool of mortgages making your individual business secondary to their own investment needs.