Understanding refinancing can be quite dizzying. The number of best scenario for refinancing available to them might initially overwhelm homeowners who are considering re-financing. However, after taking some time to educate themselves about the process, they will probably find the process is not nearly as daunting as they had imagined. This article will discuss some options available to those interested in re-financing and some of the important factors to consider in order to determine whether refinancing is worthwhile.
Understanding Refinancing 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 probably encounter. There are hybrid loan options available.
As the name implies, a fixed rate mortgage is one in which the interest rate remains constant throughout the duration of the loan period. This is an especially favorable type of loan when the homeowner has credit which suffices to lock in a low interest rate.
ARMs are mortgages where the interest rate varies during the loan period. They usually tie the interest rate to an index such as the prime index and are subject to rises and falls under this index. I consider this 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 protection written into the loan agreement. This may come as a clause which limits the amount the interest rate can increase, in terms of percentage points, over a fixed period. 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 combine 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 rest of the loan. Lenders typically offer a lower introductory interest rate for the fixed period to make the mortgage seem more enticing.
Consider the Closing Costs
The closing costs associated with re-financing should be weighed when deciding whether 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
Understanding Refinancing is necessary when deciding whether to re-finance. The overall savings is one factor the homeowners should weigh. This is important because re-financing is typically not considered worthwhile unless it results in a financial saving. Although some homeowners refinance to lower monthly costs and are not concerned with the overall picture, most homeowners consider whether they will save money by refinancing.
The amount of money the homeowner will save when re-financing largely depends 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 and the 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 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 show the new interest rate is not low enough to offset the closing costs. Conversely, a positive number shows an overall savings. With this information, the homeowner can decide whether he wishes to re-finance. Also more benefits from refinancing your current mortgage can be gain.
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