With current home loan interest rates at historic lows for an extended period of time, many people are looking to refinance their homes. You may be thinking the same thing, and you may be right. Here are some of the questions that you should be asking yourself if you are perusing the option of reorganizing your payment structure to get a better deal.
How Do I Find an Accurate, Real-time Market for Today’s Rates?Â
There are countless websites from lenders who are trying to get you to click on their links, and the bait is usually some headline about current market rates. Make sure that you do not go to the website of a commercial lender. They may try to fool you by putting forth the base rate instead of the actual rate they are offering you.
Here’s the deal: Banks get to borrow money at much lower interest rates than you do. When the mainstream media says that the interest rate is low, they are talking about the bank borrowing rate. This rate is set by the Federal Reserve, and it is the same for all banks. In most cases, the banks are forced to pass along those savings to you in the form of lower interest rates, but they do not have to. This is why you will see different interest rate offers depending on the website that you click on.
In order to make sure that you get the best deal, make sure that you visit an online calculator site that shows competing rates from many lenders at once on a comparison chart. You should be able to get comparison charts for lenders in your area. These are the only rates that you should be worried about, because you cannot borrow money at the Federal Reserve base rate.
What Are the Different Types of Refinancing Options?
Now that you understand what market rates truly are, you must understand the two major types of refinancing options to determine if now is the time to move.
The rate and term financing option allows the borrower to save cash. With this option, the balance that is still on the home is refinanced at a hopefully lower interest rate and a different term. Cash out refinancing is an option that creates an entirely new mortgage. Initially, you will owe more on the mortgage that what you owed before, but you get that difference in hard cash.
Your choice here is obviously predicated on your own need for cash at that time, but it may also be affected by the current interest rate. If you can lock in a lower rate than what you have with a fixed rate, then you may want to take the extra cash with a cash out loan. If you cannot lock in a rate that is substantially lower, then you may choose the rate and term financing option.
Should I Choose a Long Term in a Rate and Term Financing Option?
The term is what causes profit for the bank, and the term is what you should shorten as a borrower. You may be able to approximate how much more you will pay using a mortgage calculator. Depending on the current interest rate, you may be able to extend the term depending on how much you can afford each month.
Choosing a rate and term refinance option is usually the best option for people who are cash strapped. You may take this option as a bridge loan in order to cover a job loss or get through a slow season in business. Make sure that your income is consistent enough to pay back the monthly minimums for the best results with this program.
Should I Take All of the Cash in a Cash Out Financing Option?
You do not have to use all of the cash in a cash out financing option. As long as you realize that the interest will begin to accrue on the entire amount as soon as you take out the loan, you will respect the extra cash.
Cash out loans inevitably end up costing more money in the long run than rate and term financing options. However, cash out loans give more leverage to purchase large, income producing assets such as cars, artwork, expansions in real estate, and continuing education programs. Have a plan on how you will make the money back when you take a cash out loan for best results.
There is an additional risk in taking an unsecured debt and making it a secured debt. If you have problems paying this loan back, then you can expect debt collectors to start interrupting your dinner with evil sounding phone calls and messages. You will also pay dearly on your credit score.
How Should I Time the Interest Rate?
Most people should not try to time the market in order to get a continually low interest rate. Trying to play the market in this way usually results in even more debt for someone who does not understand macroeconomic cash flow. If you want to take out a loan in order to lower your interest rate, speak to your financial advisor first. Talk to your real estate agent. They will be able to give you a much better indication of what you are actually seeing in the market today and whether you will actually be saving money for yourself in the long run.
2 Point Highlight
Cash out loans inevitably end up costing more money than rate and term financing options.
There is an additional risk in taking an unsecured debt and making it a secured debt.
