Interest Rate On Refinance Home Loans Explained

When considering refinancing you have to know exactly if the loan exchange will serve the purpose that you have in mind. Thus, in order to know whether you'll be saving money on the overall life of the loan or if your monthly payments will decrease, you need to compare the loan terms of the loan to be refinanced with the new loan conditions.

Refinance Home Loans

Basically, mortgage refinancing consists on replacing an existing home loan with another one, using the money obtained from the new loan to cancel the previous outstanding loan. This is done for different purposes: for repaying the mortgage sooner, for lowering the monthly payments by extending the repayment period or by obtaining a lower rate, for saving money by shortening the loan term or reducing the interest rate, etc.

Whatever the purpose of the new loan is, there are certain variables that will determine whether the loan will suit its purpose. These variables are: The interest rate, the loan schedule, the loan amount, and the amount of the monthly payments. All these variables are related and mostly determined by the risk involved in the transaction.

Interest Rate On Refinance Home Loans

However, the interest rate is probably the most important variable as all the others can be defined or determined through it. Actually, the interest rate is a measure of the risk involved in the transaction and the rest of the variables are usually established according to the risk that lending to a particular borrower represents.

The interest rate charged on home loans is usually the lowest in the loan market only beaten perhaps by certain subsidized loan where the government or certain non-profit organizations cover for some part of the interest rate so as to provide to the borrower with a significant interest rate reduction.

A refinance home loan can feature a lower rate or a higher rate than the outstanding home loan. This will depend on the current and past credit score of the applicant and on the current and past market conditions that determine both loans. If the previous loan was taken under worse market conditions and with a worse credit score, chances are that you'll be able to obtain a better interest rate on your refinance home loan.

So, when considering refinancing, you'll need to pay special attention to the interest rate charged for the new loan and compare it with the outstanding mortgage loan so as to see if you are actually saving money by refinancing. Even if you are refinancing for other reasons, you should pay attention to the interest rate issue to be able to know how much refinancing will actually cost you so you can budget efficiently according to these new figures.

Author: Mary Wise