(mortgagerates.net - Your Mortgage Resource)

Rates

General Rates Topics

Related Articles
Mortgage Refinancing

Refinancing Interest Rates

There are two types of interest rates applied to loans: simple interest rate and compound interest rate. Simple interest rates are calculated only on the portion of the loan amount that is still outstanding. Compound interest rates are costlier than simple interest rates because interest is calculated on previously unpaid interest as well as the remaining amount borrowed. Most financial institutions today apply compound interest rates to loans.

In the case of mortgages and personal loans, compound interest rates may be established as fixed or variable. A fixed rate remains the same throughout the duration of the loan. A variable rate fluctuates throughout the loan, often within a predetermined rate range and at a predetermined pace.

There are four basic reasons to refinance a loan. They are to change the loan amount, interest rate, loan term, and/or monthly payment amount. Interest rates are cited as the most influential factor to refinance. A refinanced interest rate can be reduced if the borrower’s credit history has improved since the original loan, or if market conditions have changed in the borrower’s favor. Switching from an adjustable interest rate that is on the rise to a fixed interest rate can help keep monthly payments from growing. Or perhaps the old loan has an interest rate that is too high in today’s market, making refinancing attractive.

While refinancing at a higher interest is possible, it is usually not sought. However, mortgage loans tend to have rates lower than any other type of personal loan or credit card. Therefore, some borrowers may refinance a home even at a higher rate when buying a car or consolidating debts in order to save on interest payments. Additionally, interest payments on home mortgages are tax deductible as opposed to auto loan or credit card interest payments, which are not.

When contemplating refinancing at a lower interest rate, the borrower must calculate the true savings by keeping other refinancing costs in mind. There may be points (pre-paid interest) or application fees involved that may cancel out any perceived savings.