Affordable Home Refinancing Processes
- Mortgage refinancing is a series of transactions where you take out a new home loan and use its cash proceeds to pay off your existing mortgage. The goal with mortgage refinancing is to effectively lower your home loan interest rate. In some cases, you may decide to exchange an adjustable rate mortgage (ARM) for a fixed rate mortgage through refinancing. ARMs feature variable interest rates that shift according to economic conditions while a fixed rate mortgage locks in one interest rate throughout its term. After refinancing out of an ARM and into a fixed rate mortgage, you can then budget around regular housing payments.
- You can monitor the interest rate environment through the federal funds rate if you're exploring the possibility of a mortgage refinancing. The federal funds rate is a benchmark, or comparison standard, for mortgage rates. Banks make overnight loans to each other at the federal funds rate in order to meet their Federal Reserve requirements. On mortgage offerings, banks charge a premium above the federal funds rate. Higher mortgage rates compensate banks for taking on the increased default risks of making home loans to consumers, instead of providing overnight loans to other financial institutions. In a recession, the Fed coordinates interest rate cuts to encourage people to borrow, invest and spend money to stimulate the economy. Your chances for an affordable mortgage refinancing therefore increase amid a recession when interest rates fall due to weak loan demand and the Federal Reserve policy.
- You will be responsible for paying closing costs on your new mortgage loan. According to the Federal Reserve Board, mortgage closing costs may total up to 3 percent of your loan principal. The closing costs pay the bank to provide services that protect its own financial interests. For example, your closing costs are likely to go toward processing the loan application, home appraisal fees and title insurance. Before approving your new mortgage, the bank must verify that you are a reasonable credit risk and that your property value offers sufficient collateral.
- With a mortgage interest rate offer and knowledge of closing costs, you can plug the information into an online financial calculator to make projections. Before moving ahead with the mortgage refinancing, your long-term interest savings should exceed the upfront closing costs of the new loan. In most cases, you will come out ahead if you can lower your mortgage rate by more than 1 percent and plan to own the home for at least the next 10 years.
