Watch Out for These Costly Surprises

Beware that there may be language in the new mortgage document that could surprise you, such as the re-birth of an old enemy: pre-payment penalties.

We're hearing about some new adjustable rate mortgages (ARMs) from a growing band of lenders that may include a penalty if you refinance in the first three to five years. A few can even penalize you if you sell your home! Are you kidding? Yet another reason to avoid ARMs altogether.

These penalties are significant, too. They can be 3% of the principal or up to six months of interest. That's a $6,000 hit if your mortgage is $200,000. Chances are this will cost you thousands, so be sure to read the small print on any mortgage that you are considering!

Also, make sure that you get everything relating to the refinance in writing. Too many people have been surprised with a higher rate than verbally "promised."

Dolan Tip: The Easy (and Cheap) Way to "Refinance"

If your loan is less than two years old, we have a terrific tip for you that you may not have heard before: Check to see if your original lender still holds your mortgage (they are often sold to other mortgage holders). If so, you should ask for a mortgage "modification," a new mortgage at a lower rate without having to pay refinancing costs. Think of it as a "quasi-refi" process.

With a "modification" you agree to accept a rate that's lower than your current one but may not be as low as the going rate. This type of "no cost/low cost refinance" may be worthwhile, especially if you don't know how long you'll be staying in your home.

The Dolan Bottom Line

If you have sufficient equity in your home (if not, be ready for extra expenses and a higher interest rate), a good credit rating and, if refinancing makes sense to you after you've shopped around for the best rate, done our quick math formula and answered our three questions above ... lock in the rate now and DO IT!

Speaking of locking in rates, you may also want to talk to your lender about a "float down" rate that gives you the opportunity to take advantage if rates drop before you go to settlement. If they do drop after you have committed to a specific rate, you may "re-lock" typically 10 days before closing. It never hurts to ask!

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