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Low Mortgage Rates Promote Refinancing

[Mar 22, 2009.]


The Federal Reserve's plan to double its purchase of mortgage debt sent rates for conforming 30 year fixed rate mortgage loans to below 5%. This news could provide the help that struggling homeowners need if they're able to qualify for the best fixed rate mortgage loans. Low mortgage rates are also great news for those seeking to buy homes.

Homebuyers and homeowners can utilize free online mortgage calculator tools to estimate savings between loan options they're considering, or for preparing comparisons between existing home loans and potential refinancing terms. Although qualifying for the best rates requires good to excellent credit, decreasing mortgage rates should provide opportunities for lowering the cost of owning a home. Here's an example of how refinancing can help homeonwers save over the short and long term. Here are some things to consider when deciding whether or not to refinance a home loan.

Refinancing 101: Comparing More Than Interest Rates

Mortgage lenders encourage consumers to refinance when rates fall, but to get a true picture of potential savings, it's also important to consider lender fees and charges, discount points, and closing costs. Mortgage calculator tools can help you estimate benefits associated with refinancing, but actual results can vary according to borrower credit, amount of down payment, and loan underwriting. Underwriting is the process a lender uses to determine its likely risk in lending under specific circumstances. Typically, lenders advertise their lowest mortgage rates, but very few customers have the top-notch credit scores needed to get the best possible rates.

Loan Comparison Calculator Assists with Shopping

Getting a mortgage loan is a major financial decision, and it's important to shop carefully before selecting a new mortgage or refinancing an old one. In addition to interest rates and closing costs, Here are additonal things to consider when comparing and researching home loan options.

  • Loan Type: When interest rates fall, many homeonwers want to stabilize monthly mortgage payments by choosing a fixed rate mortgage (FRM.) Adjustable rate mortgage (ARM) loans are also available, but it's essential to understand  how an ARM can adjust. ARMs typically adjust in connection with the performance of financial indexes .  Lenders may offer ARM's with very low "teaser" rates. Although low payments can be tempting to first time homeowners, how such an ARM can adjust after the "teaser" period expires is a major consideration. Here are some scenarios to avoid:

  • Negative amortization: This occurs when the payment amount  is less than the amount needed to pay principle and interest (P&I). The unpaid amount of interest is added to the mortgage balance, which increases instead of decreasing as payments are made. Negative amortization erodes equity and increases the risk of owing more on a mortgage than a home is worth.

  • Adjustmant terms: The terms determining how payments can adjust can be very difficult to understand. It's important to know how much payments can increase with each adjustment, whether  there are "caps" on adjustments, and how adjustments are calculated.

  • Prepayment Penalties: Verify that prepayment penalties are not included in the terms of any new home loan or refinancing under consideration.

Falling interest rates can help make homeonwership accessible and affordable, but knowing how to shop for a home loan can help prevent problems.


About Author:

Karen Lawson is a freelance writer with extensive experience in mortgage banking and home loan loss mitigation programs. She holds BA and MA degrees in English from the University of Nevada, Reno.

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