Understanding the process of re-financing can be quite dizzying. Homeowners who
are considering re-financing might initially be overwhelmed by the number of
selections available to them. However, after taking some time to educate
themselves about the process, they will likely find the process is not nearly as
daunting as they had imagined. This article will discuss some of the options
available to those interested in re-financing as well as some of the important
factors to regard in order to determine whether or not refinancing is
worthwhile.
Consider the Options
Homeowners have quite a few options available to them when they are considering
the possibility of re-financing their home. The most significant decision is the
type of loan they will choose. Fixed rate mortgages and adjustable rate
mortgages (ARMs) are the two main types of mortgages the homeowners will likely
encounter. Additionally there are hybrid loan options available.
As the name implies, a fixed rate mortgage is one in which the interest rate
stays constant throughout the duration of the loan period. This is an especially
favorable type of loan when the homeowner has credit which is sufficient enough
to lock in a low interest rate.
ARMs are mortgages where the interest rate differs during the course of the loan
period. The interest rate is usually tied to an index such as the prime index
and is subject to rises and falls in accordance with this index. This is known
as a riskier type of loan and is therefore often offered to homeowners who have
less favorable credit scores.
Although ARMs are considered somewhat risky there is usually a certain degree of
protection written into the loan agreement. This may come in the form of a
clause which resticts the amount the interest rate can increase, in terms of
percentage points, over a fixed period of time. This can protect the homeowner
from sharp increases in the interest rates which would otherwise considerably
raise the amount of their monthly payments.
Hybrid loans are mortgages which unite a fixed element with an adjustable
element. An example of this type of loan is a situation where the lender may
offer a fixed interest rate for the first five years of the loan and a variable
interest rate for the remainder of the loan. Lenders typically offer a lower
introductory interest rate for the fixed period to make the mortgage look more
enticing.
Consider the Closing Costs
The closing costs linked with re-financing should be carefully considered when
deciding whether or not to re-finance the home. This is significant because when
homeowners re-finance their home they are often subject to many of the same
closing costs as when they originally purchased the home. These costs may
include, but are not limited to appraisal fees, application fees, loan
origination fees and a host of other expenses. These costs can be quite
significant. The closing costs will be significant when the homeowner 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 homeowners should carefully consider. This is important because re-financing
is typically not considered worthwhile unless it results in a financial savings.
Although some homeowners refinance to lower monthly costs and are not concerned
with the overall picture, most homeowners {{think about|consider} whether or not
they will be saving money by refinancing.
The amount of money the homeowner will save when re-financing is largely
dependent on the new interest rate in relation to the old interest rate. Other
factors come into play such as the remaining balance of the existing loan as
well as the amount of time the homeowner are anticipating to stay in the home
before selling the property. It is important to note that the amount of money
saved by negotiating a lower interest rate is not equal to the entire savings.
The homeowner must determine the closing costs associated with re-financing and
subtract this sum from the potential savings. A negative number would indicate
the new interest rate is not low enough to offset the closing costs. Conversely
a positive number indicates an overall savings. With this information the
homeowner can choose whether or not he wishes to re-finance.
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