Five Hidden Reasons for Refinancing Equity Loans

There are costs and fees associated with refinancing equity loans that you may not be aware of such as points to obtain a lower interest rate and yield spread premium, the amount of commission your mortgage broker makes on arranging the loan. Some lenders bundle all their fees for the application, credit, underwriting, processing, points, etc. into one fee. So before you make a decision to refinance, you should find out what are all the hidden fees to make sure they are legitimate fees, and you should also consider how long it will take you to offset legitimate costs by breaking even. An example is if your fees are $1,000, and your payments will be lowered by 50.00 a month. It will take you 20 months to break even. It's a good idea to have a real estate attorney review your refinance loan documents as well.

RESPA and Good Faith Estimates

Under RESPA, you are entitled to a Good Faith Estimate (GFE) of the fees associated with your closing within three business days from the time you submit your loan application. When you refinance or purchase a home, you must receive a HUD-1 closing statement as well. You can compare your HUD and GFE line by line. Fees that are marked POC are fees paid outside of the closing for an appraisal or credit report. You should review your GFE and HUD-1 closely. Your lender or mortgage broker should explain the fees to you and answer your questions. If they don't, get another broker or lender and don't sign any loan papers.

Reasons to Refinance

Refinancing equity loans makes sense for the following five reasons:

• If you can lower your interest rate at least 2 percentage points
• You have the opportunity to convert your loan to a fixed rate loan from an adjustable rate loan
• You can obtain a shorter-term loan so you can build some new equity sooner
• Avoid a large balloon payment
• You can extract some cash from your equity to pay off other bills like credit cards with high interest rates

Debt to Income Ratio and Credit Score

In order to refinance to a lower fixed interest rate, you will need a debt to income ratio below 40% and a credit score of 740 or higher. You should obtain a copy of your credit report and credit score before you apply for a refinance in case there are any errors or items you need to get deleted from the report. If your score is not high enough, you may have to wait until your score improves to take advantage of a low refinance interest rate.

Consult with a Real Estate Attorney

If you have any legal questions regarding your refinance, you should speak with a real estate attorney before you sign the documents. The attorney is an expert regarding mortgage lending and disclosure laws and can review your loan documents for you to determine if there are any lender violations or irregularities.