The cost of your home mortgage refinance package is typically made up of a number of components and the decisions made regarding these factors will affect the cost of the loan both at closing time and during the lifetime of the loan. The final cost of any loan is driven by the home mortgage rates, either fixed or adjusted over the course of time, by the closing costs as well as loan fees applied to the loan and by the length of time before the loan is paid off in full. Each of these factors can have a significant impact on the amount you pay for the use of the money to purchase your home.
Fixed or Adjustable?
A fixed rate for your home mortgage refinance means that the interest rate is set at the time of the loan closing and doesn't vary due to rising or falling market conditions, economic aspects or other factors which are out of your control. An adjustable rate mortgage (ARM) on the other hand can change, particularly in instances where the interest rates are rising steadily or even drastically during a relatively short period of time. However, the ARM does have the advantage of costing less during the initial payment periods which can range from six months to two years.
Closing costs accrued during a home mortgage refinance can be displayed in a higher or lower interest rate and can be added to the principal to be repaid on the loan or can be required to be paid in cash at closing. Typical costs that are associated with closing are prepaid interest points, loan document fees, loan origination fees, title search, property inspection and property appraisals. Whether these are paid directly, or are rolled into the cost of the loan, they must be paid and must be considered as a cost of money.
An option ARM is a fairly new type of refinancing on the market and is more common with new home loans than with refinances. Choosing this type of mortgage loan, means that you are beginning the loan with payments that are less than the necessary cost to cover the home mortgage rates interest and principal costs. The difference between the payment amount and the total cost of the monthly payment is simply added to the principal balance and interest is charged against the revised amount. For a person with a flexible income this can be a great choice, but it requires self discipline to make additional payments when the income level is higher.
Another component that is important in determining the final cost for the home mortgage refinance is that of the loan term. This is effectively the length of time before the mortgage is complete paid off. Obviously, the longer it takes to pay off the principal, the more interest will be charged and vice versa. At the same time, a longer loan term means that the payments on a monthly basis will be lower because a smaller proportion is going toward the principal.
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