7 Tips for Improving Your Mortgage or Loan Terms

If saving more money is one of your new year's resolutions, then improving your mortgage or loan terms should be a big item on your "to-do" list. Reducing the interest rate, fees, and term of the loan has the potential to save you vast sums of money. There are several proven ways to improve your loan terms, and with the right knowledge and strategy you can be socking away big savings in no time.

Refinance Your Loan

As a borrower, it is your right to shop around and see what kinds of interest rates and terms other banks and lending institutions are offering. If you qualify for and get a mortgage with better terms, one that has you paying less every month for the same debt, consider taking the money you're saving and using it to pay off your mortgage faster. Refinancing should never incur more debt but merely transfer your existing debt to a new lender with a lower interest rate and fewer fees, saving you money.

Be Careful Of Fees

Because all lenders are aware of a borrowers' right to refinance a loan, some have worked in prohibitive fees that take effect if a borrower tries to pay off the remaining debt in one shot. The most common such fee is known as a "prepayment penalty," which is sometimes considered the greatest deterrent to refinancing. Since lenders make money on the interest paid over the full term of the loan, prepayment penalties are set to protect the lender from losing thousands of dollars if a borrower refinances and pays back all of his or her money at once.

Check your mortgage or loan document for a prepayment penalty clause (not all loans have them, but if there is one, it must appear on your document), and decide how much it will cost to refinance. If the penalties outweigh the money saved by refinancing, consider trying other options for improving your loan terms.

Loan Modification

Rather than replacing one loan with another, a loan modification renegotiates the terms of your existing loan. The reality is that most borrowers never even try negotiating their loan terms. Instead, they just take the loan at face value, exactly as it is structured. Don't make this mistake - if you have concerns over your loan and are struggling to make payments, call or visit your lender and ask about modifying your loan to more favorable terms.

Additionally, though loan modification has always been an option for borrowers, President Obama enacted new policies in 2009 that make the process even more attractive for truly distressed parties. USNews reports that Obama's plan was predicated on the belief that "restructuring distressed mortgages will keep struggling borrowers in their homes and help insert a floor beneath plummeting property values." Federal incentives have been provided to lenders to keep monthly payments at no more than 31% of the borrowers gross monthly income. If you are facing foreclosure due to a distressing mortgage, make sure to get in touch with your lender immediately and ask about modification.

Use Negotiation Leverage

Whether you're applying for a new loan or trying to modify an existing one, you need to be aware of the leverage you can use during your negotiations with a lender. If you have been a reliable customer of the bank or lending institution for more than a year, bring this up during the negotiation. Few lenders will tell an existing customer that they simply cannot negotiate loan terms at all, as it is never in the bank's best interest to send faithful business away to other institutions.

Act with confidence and inform the bank that you have the time to shop for the best deal possible. Let them know that you are in no hurry to pounce on anything they put in front of you, and make sure they give you their absolute best terms up front so as not to waste your time or theirs.

Get a Better Offer From Another Lender

If you're considering the idea of refinancing and are actively applying for new loans, be sure to contact your lender and inform him or her of any better deals you are approved for from other banks. This is a strategy that could help you avoid refinancing and push your current lender into restructuring your loan. Show your lender an official offer from a competing lender and request it be matched or you will take your business elsewhere. This situation forcers your lender to restructure your loan or lose your business, so a smart lender will take your deal.

Know Which Parts Of A Loan Are Negotiable

As you prepare to negotiate lower terms for your mortgage or loan,  familiarize yourself with which numbers are actually negotiable. The first and easiest part of the loan to knock off is the lender's fees, usually contained in a section of the loan known as "loan origination fees." The Wall Street Journal confirms this negotiating strategy, reporting that "Administrative fees over and above that one point -- including document-preparation fees, processing fees, wire-transfer and courier fees -- are simply padding the bill. Demand that the mortgage company cover those costs."

Another important part of the loan up for negotiation are the "points." Points are the upfront cost of the mortgage, with each point representing 1% of the total loan amount (2 points on a $100,000 mortgage would cost $2,000, for example). Additionally, some skilled negotiators are able to negotiate the interest rate down, however this is one of the more difficult aspects of a loan to reduce. To almost guarantee a significantly lower interest rate, it helps to bring a better offer from another lender as discussed above.