How to Refinance a Home Loan without Getting Duped

If you are planning to refinance your home loan, there is a good chance that you already received several offers. As homeowners, we are bombarded with offers to refinance. Sometimes, you'll get two or three promotions per day in your mailbox. You'll read claims that sound great. They'll tell you about a low monthly payment for a large mortgage balance in hopes that you'll call the toll free number. However, these claims are not always as great as they sound. In fact, many companies make a habit of duping their customers into unfavorable refinances. Here are a few things that you should watch out for if you want to keep yourself from being duped. 

Introductory Offers

One of the most common schemes that lenders use is an introductory rate. On the flyer that you received in the mail it might say something like "$900 a Month for a $250,000 Mortgage!" However, this is not a long term offer. You sign up for the loan with the belief that you will receive this monthly payment for the life of the loan. For the first few months, everything is fine and you think you've scored a great deal. Then one month, you get a bill in the mail for $2000. You call the mortgage company to find out that this was only an introductory APR. You agreed to the contract and it explained everything in the fine print. Many companies offer these introductory APR's to get your attention and make you sign the deal. Then the rate changes and your payment skyrockets. Be aware of these offers before you sign on the dotted line. 

Payment Terms

Another common way that many consumers are duped is through alternative payment terms. With a 30-year fixed mortgage, you have the same interest rate and the same monthly payment for 30 years. By the time you get to the end of the 30-year term, your mortgage balance is paid off. You have made steady payments on the interest and the principal. However, there are other types of loans out there that are set up completely different.

For example, many people have agreed to interest-only loan terms. Some of them agree without fully understanding the repercussions. If you sign up for an interest-only loan, you are only making payments on the interest that is accumulating every month. You never make any headway with the principal balance of the loan. When you are looking at your options for mortgages, the interest-only loan looks like a better deal. You see a lower payment and you go for it. However, this could be a quick way to financial ruin.

When you get to the end of your loan term, the entire balance of the house is still sitting there waiting for you to pay it off. This is called a balloon payment and is a common tactic of unscrupulous refinancing companies. Watch out for it as it can really catch you off guard when the balloon is due.