People have various reasons for wanting to refinance their home loans and some of the more popular reasons are to refinance for lower monthly payments and to consolidate debt.
However, you should realize that there are fees involve in switching your home loan. The most significant of these refinancing costs are the pre-payment penalties charged by some lenders.
Pre-payment penalties are often misunderstood by borrowers, but basically it's a fee the lender includes in your contract if you pay off your home loan ahead of time.
Home loans with pre-payment penalties are usually priced at lower interest rates than other loans without any prepayment penalties. So, this is something you should look out for when you see one lender advertising very low rates compared to other lenders.
These lenders offer a lower interest rate if you're willing to take a prepayment penalty since this will prevent them from taking a loss if decide to switch your home loan within a few months of taking the loan.
Most prepayment penalties are three months interest on the total of your loan. Having said this, one way to avoid paying a penalty is to plan your refinancing in advance and then give notice to your bank ahead of time.
In other words, if you give your lender advanced notice and are prepared to sit out the prepayment period you'll avoid paying this fee.
There are also other fees involved in switching your homeloan, but the biggest cost is usually the prepayment penalties. So, by knowing how prepayment penalties work you can make an informed decision on how to pay off your loan
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