The Ins and Outs of Refinancing

Posted by  on Apr 01, 2010

Some people are probably thinking about refinancing, and thereby curious as to whether it is a good idea for them or not. Some people are probably interested in mortgage rates and all of the actions associated with real estate and buying a home. If this is you, it is a good idea to research a little bit about what you are interested in and what will work best for you according to your situation. To start, it is a good idea to discover whether or not you should refinance. To do this, one of the first things you can do is to contact your current lender to see if you can negotiate with them to waive some of the closing costs.

One underrated way to save money is known as an ARM or an adjustable mortgage rate. This type of rate is affected more by changes in the fed rate because these types of loans follow short-term interest rates, such as Treasury bill rates, which follow the fed rate. An ARM is a good idea if you are planning to stay in a home for a couple years and you can get an ARM for significantly less than a fixed rate mortgage, you may come out ahead by going for the ARM. Adjustable rate mortgages are also popular with people who may have difficulty qualifying for a loan at higher fixed interest rates.

The reduction in interest rates by the Federal Reserve doesn't necessarily result in drastically lower rates for fixed-rate mortgages. Several people believe and preach that it only makes sense to refinance your mortgage if the new interest rate is at least two percentage points lower than your current rate. Forget this piece of advice. It worked in the days when you could only get a 30-year fixed rate mortgage. It doesn't apply in today's financial markets where there are many options for financing your home, including fixed mortgages with terms of 15, 20, or 30 years.

It is a good idea to be familiar with the fact that the lower ARM rate lowers their monthly payment, making it easier for them to qualify for the loan. If you already have an ARM and you plan to stay in your house for the long-term, consider locking in at today's attractive fixed mortgage rates.

Also remember that an adjustable rate mortgages typically start at a lower interest rate but interest rates and payments fluctuate depending on market interest rates. A typical ARM is adjusted annually. Increases are usually capped for any given year and for the life of the loan. For example, a typical ARM might include an annual cap of two percentage points and a cap over the life of the loan of six percentage points. An ARM that starts out at 7.5% could increase to 9.5% in the second year, 11.5% in the third year, 13.5% in the fourth year, at which point it would be capped. These loans are popular with people who expect rising income over the next few years because they can buy more house on a lower current income, confident that their increasing income will make the higher payments affordable if the interest rates rise.


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