Five things to consider before you switch loans
When you’re considering refinancing an existing loan, it is important to look at a number of aspects of the loan. This will ensure that you don’t wind up paying more over the term of your new loan and you make genuine savings. Here are five things to consider before you switch loans.
1. Various fees
Depending on the type of loan that you are switching to, you may be asked to pay several fees. Some of these may include application fees, broker fees or fees for credit reports. Before agreeing to look at other loans, find out what fees you may have to pay. For example, a home loan may require an appraisal fee. Another fee that often surprises borrowers is prepayment penalties on existing loans. These fees may make refinancing a loan unfeasible as you would not save as much money.
2. Interest rates
Interest rates vary between lenders and even a small change of one-eighth to one-quarter of a point can make a significant difference over the life of the loan. Borrowers should also be aware that the longer the loan term, the higher the rate. This is because lenders are taking a greater risk. Pay special attention to loans that have automatic increases, such as adjustable rate loans, or loans that allow lenders to increase rates if payments are made late.
3. Special loan promotions
Borrowers should pay special attention to promotions that are offered by lenders. Often, lenders will offer no-cost refinancing of loans, but the rates are higher. This can mean that the borrower is still paying the same fees that other lenders charge; they are just paying them over a longer period of time. Carefully review and evaluate all special promotions on loans, including low or no document loans, loans with no closing costs and loans that offer a lower starting rate that changes to a higher rate in six months or more.
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