Refinance Interest Rates

By: EconomyWatch Content   Date: 2 November 2009

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Refinancing is often used to restructures your debt, usually at lower refinance interest rates and a different loan term than your existing mortgage. 

Refinance Interest Rates: When to Opt

The ideal conditions under which you can opt for refinance interest rates are:

  • Decline in mortgage interest rates. Refinancing in this scenario can lower your monthly payment while maintaining the repayment term. Alternatively, you can shorten your repayment term while maintaining the payments to your original mortgage.

  • Significant appreciation in the market value of your home. Through refinancing, you can benefit from the increased equity in your home.

  • Substantial time period is left for the complete repayment of your original mortgage. Refinancing is most beneficial in the early years of your mortgage, when your payments are primarily going toward interest. In the later years of your mortgage, you begin to pay more principal than interest, and sticking to the original loan is a better option.

Refinance Interest Rates: Types of Mortgages

Broadly speaking, there are three types of mortgages:

  • Fixed-rate mortgage: This type of mortgage can help you lock in significantly lower interest rates than that applicable on your original loan. As a result, you can reduce your monthly payments. You can also opt for this refinance option to shorten the mortgage term, reducing the overall interest paid and increasing equity. This option is best for homeowners who intend to stay in their home indefinitely.

  • Adjustable-Rate Mortgages (ARM): This type of mortgage has an initial interest rate that is lower than that of many fixed-rate mortgages. However, refinance interest rates in ARMs may change based on market conditions. Opting for ARMs during refinancing is a good option for homeowners paying high interest rates in their fixed-rate mortgage. Borrowers who selected ARMs for their original home loan option may also refinance through a lower rate ARM.

  • Cash-out refinances: Through this option, you can get a new, larger mortgage to pay off the existing balance and provide extra cash. You can use this extra money to consolidate and pay off debts for education or home improvements. Cash-out refinancing is often used to consolidate high-interest, nondeductible debt.

However, before you opt for refinance interest rates, you must be aware of critical factors such as the length of the remaining loan term, your credit score and the loan prepayment penalty.


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