A home refinance loan’s interest rates may determine if you save or lose in the process of refinancing, which is the process of obtaining a new mortgage loan that pays off the original loan, and then replaces it with the new loan terms.
Some advantages of refinancing are lower monthly mortgage payments, lower interest rates to save hundreds of dollars per year, or even to pull cash from the equity built up in the home. However, you can find some disadvantages of refinancing are that the homeowner could incur penalties for paying down the existing mortgage with a line of home equity credit and the fees associated with refinancing can add up to thousands of dollars. While refinancing can be a money-saving option for borrowers with good credit history, it can be risky for borrowers with less-than-perfect credit.
Home Refinance Loans Interest Rates
What Are Home Refinance Loans Interest Rates?
Home refinance loan interest rates are essentially the price charged by lenders lending their money to borrowers. Interest rates are comprised of three main components: credit risk, inflation, and liquidity. Credit risk is the perceived risk the lender is taking that the loan will not be paid back as scheduled. Inflation is the change in the level of national prices. Liquidity is the compensation that is received by the lender for assuming the risk of lending the funds. National interest rates are determined by three factors: the Federal Reserve, the demand for U.S. Treasury notes and bonds, and the banking industry. The Federal Reserve sets the rate for the federal funds, which affects variable interest rates.
How Does the Process Work?
The first step in the appraisal process is having the home appraised. The lender then determines how much of the appraisal value they are willing to loan. Next, the balance owed on the original mortgage is subtracted. The remaining balance is what is loaned to the homeowner. Many homeowners improve the value of their homes over time. By making payments to their mortgage while increasing the value of their home, homeowners are able to increase the difference between the appraised value of their home and the amount owed on their mortgage. This allows the homeowner to take out a substantial home equity line of credit.
For example, if a homeowner took out a 30-year loan for $200,000 with a 6.7% interest rate, five years ago, the current monthly payment would be approximately $1,300. If the homeowner refinances the loan of $188,000 for 25 years, with a 4% interest rate, then this would decrease their monthly payment to $1,000. In this scenario, the homeowner would save almost $90,000 in finance charges over 25 years. Rates are even lower on 15-year mortgages. In this scenario, a 15-year mortgage with an interest rate of 3.3% would only lower the monthly payment by about $30.00 per month. However, by paying off the loan 10 years sooner, the homeowner would save approximately $149,000 in interest.
Factors Lenders Take Into Account to Offer Rates
There are seven basic factors that lenders take into account when deciding what home refinancing loan interest rate to offer a prospective borrower. These seven factors are: the borrower’s credit score, location of the home, requested mortgage amount, down payment available, the term of the loan, the interest rate type, and the loan type. The two basic interest rate types are adjustable interest rates which fluctuate based on the market and fixed interest rates, which stay the same over time. A higher credit score, larger down payment, or shorter term of the loan can all lower the interest rate. Comparing interest rates offered by multiple lenders is one way to ensure a homeowner gets the best rate.
Home refinance loan interest rates can fluctuate daily. Currently, the average interest rate for a 30-year fixed mortgage is 4.88%. We have included a link to today’s current mortgage interest rates. This link will provide the current interest rates for the four basic types of mortgage loans.
In closing, interest rates can be affected by multiple factors. For homeowners that are looking to refinance their current loan, a little extra leg-work can result in huge savings down the road.
