Before refinancing home loans, borrowers should consider all of their options, including both conventional mortgages and home equity loans. Closing costs on some refinance loans are significant, so borrowers should make sure they understand the total cost of a refinance before committing to a new loan. Many borrowers obtain a loan from the bank that they hold their deposit accounts at, but an existing banking relationship is not a guarantee of a low rate loan. Borrowers should always begin the refinance process by contacting at least three different lenders to get an idea of different rate and term options.
In the lending arena, short-term loans have the lowest rates because borrowers have less opportunity to default. Conventional mortgages in many countries have 30 year terms, but banks often write home equity loans that have terms of just five or 10 years. Short-term loans result in much higher monthly payments, but reduced interest rates save money in the long-term. People with sufficient income to cover large monthly payments should shop around for short-term loans. Conversely, people who are primarily concerned with keeping monthly expenses to a minimum often benefit from extending their loan term when refinancing home loans.
Conventional mortgages tend to have higher closing costs than home equity loans because lenders normally sell mortgages to investors and rely on loan origination fee income to make money from writing the loan. Mortgage rates in most countries are tied to the yields on government bonds, whereas home equity loan rates are based on the cost of interbank lending. When both rate indexes are low, home equity loans are often more cost-effective because of the minimal closing costs. Loan applicants should ask their lenders for a direct total cost comparison between a conventional mortgage and a home equity loan to see which option works out to be the least expensive.
People with poor credit usually have difficulty refinancing home loans because lenders are reluctant to lend funds to people who are perceived as high-risk borrowers. Some countries have programs that allow people with poor credit to obtain government backed loans that have much looser underwriting requirements than other loans. In the absence of government backed loans, borrowers with poor credit or limited income should look for lenders that allow borrowers to add non-owner co-applicants to their home loans. Adding a co-applicant with a good credit score can enable an otherwise non-qualified borrower to refinance a home loan.
Local government and charitable groups often provide grants or low cost loans to people refinancing home loans secured by properties that are in a state of disrepair. In some instances, these loans may be sufficient to refinance the entire existing home loan. Borrowers should contact the local housing authority or government department that handles housing to find out what options are available.
