Understanding Re-Financing

Even though rates have been rising in the last few years, homeowners still have many reasons to refinance their home loans. The main reason is debt consolidation, whether you are combining credit card debts with your home mortgage or if you have more than one home loan. You can also refinance to a lower rate if your credit score improves.

Understanding the process of re-financing may be rather dizzying. Householders who are considering re-financing might initially be overwhelmed by the number of alternatives available to them. However, after taking some time to educate themselves about the process, they’ll likely find the process isn’t nearly as daunting as they had imagined. This article will discuss a few of the alternatives available to those interested in re-financing as well as a few of the important factors to consider in order to determine whether or not refinancing is worthwhile.

Consider the Options

Householders have rather a few alternatives available to them when they’re considering the possibility of re-financing their house. The most important decision is the type of loan they’ll decide. Fixed rate mortgages and adjustable rate mortgages (ARMs) are the two main types of mortgages the householders will likely encounter. Additionally there are hybrid loan alternatives available.

As the name implies, a fixed rate mortgage is one in which the rate of interest remains constant throughout the duration of the loan period. This is an specially favorable type of loan when the householder has credit which is sufficient enough to lock in a low rate of interest.

ARMs are mortgages where the rate of interest varies during the course of the loan period. The rate of interest is normally tied to an index such as the prime index and is subject to rises and falls in accordance with this index. This is considered a riskier type of loan and is therefore frequently offered to householders who have less favorable credit scores.

Although ARMs are considered somewhat risky there’s normally a certain degree of protection written into the loan agreement. This may come in the form of a clause which limits the amount the rate of interest may increase, in terms of percentage points, over a fixed time period. This may protect the householder from sharp increases in the rates of interest which would otherwise considerably raise the amount of their every month payments.

Hybrid loans are mortgages which combine a fixed element with an adjustable element. An example of this type of loan is a situation where the loaner may propose a fixed rate of interest for the first five years of the loan and a variable rate of interest for the remainder of the loan. Loaners normally provide a lower introductory rate of interest for the fixed period to make the mortgage seem more enticing.

Consider the Closing Costs

The closing prices associated with re-financing should be carefully considered when deciding whether or not to re-finance the house. This is significant as when householders re-finance their house they’re frequently subject to many of the same closing prices as when they originally purchased the house. These prices may include, but are not limited to appraisal fees, application fees, loan origination fees and a host of other expenses. These costs may be quite significant. The closing prices will be significant when the householder considers the overall savings associated with re-financing.

Consider the Overall Savings

When deciding whether or not to re-finance, the overall savings is one factor the householders should carefully consider. This is important as re-financing is normally not considered worthwhile unless it results in a financial savings. Though a few householders refinance to lower every month prices and are not concerned with the overall picture, most householders consider whether or not they’ll be saving money by refinancing.

The amount of money the householder will save when re-financing is largely dependent on the new rate of interest in relation to the old rate of interest. Other factors come into play such as the remaining balance of the existing loan as well as the amount of time the homeowner intends to stay in the home before selling the property. It is important to note that the amount of money saved by negotiating a lower rate of interest isn’t equal to the entire savings. The householder must determine the closing prices associated with re-financing and subtract this sum from the potential savings. A negative number would indicate the new rate of interest isn’t low enough to offset the closing prices. Conversely a positive number indicates an overall savings. With this information the householder may decide whether or not he wishes to re-finance.