How Does A Low Mortgage Rate Refinance Work?

Article Written By: JohnCW

Most homeowners have heard the buzz that interest rates on mortgages are at a 40-year low and that they can save a significant amount of money by refinancing their home. However, before making a commitment, homeowners need to research what is available for them and make a determination as to whether refinancing offers them any value. Refinancing costs money in fees, including what the lender and/or mortgage broker charges, title search, title insurance, appraisal, and recording fees.

Many homeowners will benefit by refinancing their mortgages including those who do not have immediate plans to sell their home, those who have an adjustable rate mortgage with a rate that they expect to increase in the near future, and those who have a balloon mortgage that will be maturing in the near future.

However, some homeowners will not benefit by refinancing their mortgage or the lender may not accept their loan application. These people include those who have changed occupations or jobs that resulted in a drastic change in their income, those whose property lost value because of the downturn in the real estate market, and people who have recent problems with their credit, such as too much credit card debt, recent bad payment history, and/or a recent bankruptcy filing.

While many people refinance in order to obtain a lower monthly house payment, if the difference in the interest rate is considerable the homeowner might consider shortening the amortization schedule, such as financing the property over a 25-year rather than a 30-year mortgage. Most lenders offer a lower interest rate for shorter loan periods. The difference in payment may not be too significant but the money that the homeowner saves over the life of the loan may be substantial.

Following is an example of how all of the different factors come into play:

A loan of $125,000 at seven percent interest amortized over a 30-year schedule has a monthly payment of just over $830 dollars for principle and interest. If the current rate offered to a homeowner is four percent, the new payment amortized over a 30-year schedule is almost $600. Refinancing the same loan at four percent interest for 25 years makes the mortgage payment $660 per month. While refinancing the loan at 30 years will make a difference of $34,550 over the life of the loan, by shortening the loan to 25 years the homeowner will realize a difference of $101, 447.

There are people who simply cannot afford the higher house payment at the time that they refinance their home. However, if they keep in mind that an additional 62 dollars a month when they can afford it, they will certainly make a difference in the time it takes to pay off the loan. In addition, making an additional payment of 62 dollars a month for ten months is like making an extra house payment a year and that can add up to great savings over the life of the loan.

Finally, most lenders do not have a prepayment penalty although it is possible, especially in the private sector. The homeowner needs to make sure of that and to understand all of the terms of the loan before making a final commitment to refinance their mortgage.

About the Author

Continental Home Loans Inc. (CHL), is a multi-state licensed banking entity that originates mortgage loans directly to consumers. Visit our website
Long Island mortgage companies for more information.

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