How to Negotiate for an Optimal Refinance Term

You can make your monthly loan payments smaller or pay off your mortgage faster by refinancing the term. In this case, term means the entire length of the loan. The standard mortgage varies from 10 to 30 years, with most people leaning more toward the long-term loan option. Once you have paid off your loan for a number of years, opting to refinance the term can be beneficial to both you and the bank.

How you Benefit from Term Refinance

If you initially took a mortgage of $350,000 and have paid off $50,000, your remaining mortgage is $300,000. Your initial loan term was 30 years. That means, at this point, you have $300,000 of mortgage to pay off in 20 years. For some people, this monthly payment will be a burden. You can approach the lender to ask for a second mortgage with a 30 year term to pay off the additional $300,000, significantly reducing your monthly payments. Similarly, if you know you can pay the loan off faster, you may refinance to ask for a new 10 year mortgage at $300,000 and raise your monthly payments.

How the Lender Benefits from Term Refinance

Borrowers refinancing to a longer mortgage will be offering the lender more profit over time through interest. Borrowers who have been inconsistent with payments or show a high risk of defaulting will not likely receive this option. However, if a lender can be fairly certain the loan will be paid off in the longer-term, there is no real downside to refinancing in this way. Refinancing to a shorter mortgage, however, does present the lender with a loss. In this case, the lender will only benefit if they would like the extra cash now through higher monthly payments.

Penalties to Refinancing your Term

When you refinance, the lender must go through the entire process of originating a loan for you again. This process comes at a premium. In addition to refinancing fees, the lender may want additional cash up front for the option to refinance. Like a second down payment, this can be up to 3% of the total sum remaining on the mortgage. Finally, if you are refinancing to a shorter loan, the lender may charge you a prepayment fee on the initial loan to partially overcome the profits lost due to a lack of additional interest over the years.

Negotiating for the Best Option

Despite these fees, mortgages are such large loans that you may still benefit from a refinance if the new terms are right. In order to get your lender to agree to your new terms, provide sufficient financial information to show you are worthy of the refinancing option and will continue to make your loan payments. Showing a schedule of payments you have already made will be helpful.

You may also consider submitting new financial information, such as evidence your income has gone up or your other debts have been paid down. If you are negotiating for lower monthly payments, you may consider providing information showing your current payments put you at a greater risk of default than the lower payments would.

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