If you can 'finance' today with a "no-cost" loan at a lower interest rate—meaning you pay no points or closing costs, and the interest rate is actually lower than your current rate—run, don't walk, to your lender's office. But this golden scenario rarely applies.
Direct from MSN.com Refinance section 2002
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From the Fannie Mae Foundation
Most lenders are trustworthy-but unfortunately, some lenders are not. They sometimes direct borrowers away from loans with more affordable interest rates. Instead, they offer loans that carry very high interest rates, questionable fees, and unnecessary charges. These practices are considered predatory lending.
A predatory lender may be large company with a name you know. Or it may be a small company or a loan broker you’ve never heard of. But predatory lenders have many of the same traits. They:
- Offer loans based solely on equity in a home, not on the borrower’s ability to repay the loan.
- Charge unusually high interest rates for loans;
- Add excessive to a loan without lowering the interest rate;
- Include excessive fees; and
- Tack on unnecessary costs, such as prepaid single-premium credit insurance.
With or without these extra charges, you may find it difficult or even impossible to repay the loan. If you fall behind in your payments, more charges may be added. Or the lender may suggest that you refinance the loan to lower your monthly payment. But the unpaid payments may be added to the new loan amount. Costing you even more money over time. Then the loan becomes even more difficult to repay. If you can’t make the payments, you could lose the items you purchased or used to secure the loan.
Most often, the victims of predatory lenders are low- and moderate-income persons, minorities, and the elderly. But anyone-including you-can be misled by a predatory lender. You may want to consolidate credit-card debt or buy your first home. If you already own your own home, you may want to make repairs to it. Your reasons for a loan may be good, but if you agree to an unfair loan, you could lose your home!
Here is an example of what can happen if you’re not careful:
The Smiths had always dreamed of buying their own home. They were in their early 30’s and had a household income of $ 48,000 a year. They had experienced some credit problems in the past but had paid their bills on time for two years. Still, they were afraid that their previous credit problems would make it impossible to qualify for a mortgage at bank or credit union. They were happy to get a letter from ABC Quick Credit that offered easy mortgage for everybody.
After talking to folks at ABC, the Smiths felt confidence that they were getting a great deal. They didn’t bother to check with other lenders to see if they could get a more favorable interest rate. Instead they went with ABC. The friendly loan officer told them he had helped many others in their situation. Getting the mortgage WAS easy-they received a $90,000 adjustable rate mortgage.
But at an interest rate of 15 percent with 7 points. And, as a condition of the ABC loan, they also had to purchase credit life insurance for $500.
If they had shopped around, the Smiths would have realized that they would have qualified for a better loan, a fixed-rate mortgage at 8 percent with 2 points and no credit life insurance. The ABC loan officer had said to trust him-and, unfortunately, that’s just what the Smiths did.
At the end of the first year, the mortgage interest rate went up 2 percentage points to 17 percent-and their mortgage payment increased by $145 a month! The Smiths quickly felt behind in their payments. They tried to get help, but it was too late. They lost their home.