If you are one of those who only focus on benefits associated with refinancing and neglect minute weaknesses related with mortgage loan, then you are becoming an example of poor financial management. Most of the homeowners give strong attention in getting low interest rate but they neglect penalties associated with their previous loan, which nullifies their low interest rate advantage and even cost them bigger. Following is the list of penalties involved in refinancing which can be avoided by doing proper research.
• Prepayment penalties: Most of the contemporary mortgage loans bear prepayment penalties that make your refinancing decision costlier. In case, you pay mortgage loan before your loan maturity then you will be charged prepayment penalties that can cost you thousands of dollars if your loan amount is high. These prepayment penalties will apply, if you make one time bulk payment of 20% of your outstanding loan amount.
• Amortization: According to mathematics of amortization, whatever payment you will make at the initial stage will only go for interest. Homeowners who have loan period of more than 10 years have to pay substantial part of their installment for principal payment. So larger is the loan period more are the amortization charges and those can be reduced by opting for loan term of 15 to 20 year.
• New closing cost: These charges are difficult to avoid because if you are refinancing a new loan then these are compulsory and attached including recording cost, examination and scrutiny fees. Borrowers have to pay these charges either in the form of cash or they get added to the outstanding balance of new loan amount.
• Relocation Anticipation penalties: These penalties are incurred in very rare cases, when borrower shifts to other location from his existing home in three to five years. These charges are extremely high and can go beyond one percentage point of the entire mortgage loan. So you should be aware of your long term living plans to avoid such major penalties.
Knowing above penalties in advance will definitely help you in working out your monthly installment including the charges associated with mortgage loan. That will ultimately help you in proper financial planning which is necessary prior to taking any form of debt. By taking suitable measures you can minimize these penalties up to significant extent and thereby control your loan installment drastically.
