Understanding the refinancing process can be quite dizzying. Homeowners who are considering refinancing may initially be intimidated by the number of options available to them. However, after taking some time to understand the process, they may find that the process is not as daunting as they thought. This article will discuss some of the options available to those interested in refinancing, as well as some important factors to consider to determine if refinancing is worthwhile.
Consider the Options
When homeowners consider the possibility of refinancing their home, they have quite a few options to choose from. The most important decision is what type of loan they will choose. Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two main types of mortgages that homeowners are likely to encounter. In addition, there are hybrid loans available.
As the name implies, a fixed-rate mortgage is one in which the interest rate remains the same for the entire term of the loan. This is a particularly beneficial type of loan when a homeowner has enough credit to lock in a low interest rate.
ARMs are mortgages where the interest rate changes over the life of the loan. The interest rate is usually tied to an index, such as the prime index, and rises and falls based on changes in that index. This is considered a riskier type of loan and is therefore usually offered to homeowners with lower credit scores.
Although ARMs are considered risky, there is usually some level of protection written into the loan agreement. This may come in the form of a clause that limits the amount (in percentage points) by which the interest rate can increase over a fixed term. This protects the homeowner from sharp increases in interest rates that would otherwise significantly increase their monthly payments.
A hybrid loan is a mortgage that combines a fixed element with an adjustable element. An example of this type of loan is that the lender may offer a fixed rate for the first five years of the loan and a variable rate for the remainder of the loan. The lender usually offers a lower introductory rate during the fixed period to make the mortgage look more attractive.
Consider Closing Costs
When deciding whether to refinance your home, you should carefully consider the closing costs associated with refinancing. This is important because when homeowners refinance their homes, they often have to pay many of the same closing costs as they did 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 fees. These fees can be substantial. If a homeowner considers the overall savings associated with refinancing, then the closing costs will be substantial.
Consider the overall savings
Overall savings is a factor that homeowners should carefully consider when deciding whether to refinance. This is important because refinancing is often not considered worthwhile unless it results in financial savings. While some homeowners refinance to lower their monthly costs and are not concerned with the overall picture, most homeowners consider whether they will save money by refinancing.
The amount of money a homeowner can save when refinancing depends largely on how the new rate relates to the old rate. Other factors also play a role, such as the remaining balance on the existing loan and how long the homeowner intends to stay in the home before selling the property. It is important to note that the money saved by negotiating a lower interest rate does not equal the full savings. The homeowner must determine the closing costs associated with refinancing and subtract that amount from the potential savings. A negative number indicates that 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 decide if he wishes to refinance.