Importance of Interest Rate on Refinance Loans

The interest rate is an issue that should never be bypassed when it comes to refinance home loans. Its importance is crucial as it will determine whether you benefit from refinancing or not. Though other loan terms like loan length, loan amount, and other less important clauses should also be considered, the interest rate should be your main concern.

To simplify comparisons you should (on the many rates that may be thrown to you) concentrate on the APR. The Annual Percentage Rate will provide you with the best figure to know which loan is best for you. This figure takes into account not only the interest payable over the term of the loan but also any other related charges or fees. As such it is the best measure for comparing the cost of borrowing from one lender to another.

Risk And Rate

Since refinance loans are secured loans, they carry rather low interest rates. However, your credit score will still modify the interest rate you will be charged for your loan. Thus, a good credit score applicant will get significantly lower interest rates than a bad one. Risk and rate are directly related and whenever you represent a higher risk, this is unavoidably translated into higher interest rates.

There are also other loan terms that modify the risk implied in the financial transaction and thus modify the interest rate you will have to pay for the refinance loan. Insurance, loan length, interest rate type, etc. are some examples of these terms. You can always discuss with the lender these subjects so as to get a competitive rate by modifying loan terms.

Different Loans, Different Rates

Different kinds of loans carry different rates. The interest rate charged for a 10 years home loan will be lower than the rate charged for a 20 years or 30 years home loan. Also, the interest rate charged for home loans with fixed rates tends to be higher than that of variable rate. However, variable rates can rise to new heights changing the original ratio.

Cash out refinance loans tend to carry higher rates than plain refinance loans. This is because the costs of cash out refinance loans include additional charges, more insurance, etc. It all adds up to the fact that the loan terms will determine the interest rate and that little variation on the loan terms can result in raises or reductions on the interest rate.

Huge Savings

Thus, the key to refinancing is to agree with the lender the loan terms in order to obtain a lower interest rate. This can be boosted by requesting a refinance home loan with a shorter loan length. The main benefit of refinancing is that by obtaining a lower interest rate you can get huge savings over the whole life of the loan.

For example: If you have an outstanding mortgage of $50,000 with 10 years more of repayment at an 8% APR, You will end up paying $40,000 on interests by the end of the loan term. If you refinance at a 7% APR, you will end up paying $35,000 on interests which represents savings of $5,000.