Rate And Term Refinance

  

Categories: Credit

We love our home, but we sure do hate our home loan. Yin/yang. Give/take.

Why do we hate our loan? Because we got locked into a high interest rate that’s causing us to pay about $200 extra every month, and who likes to shell out extra benjamins just to pay interest on a loan? Nobody, that’s who. Which is why we’re looking into a “rate and term refinance,” which is basically a home loan that we refinance in order to secure a better rate, or better terms. A better rate means a lower rate, and better terms can mean a number of things, depending on what kind of loan we’ve got. For example, if we somehow ended up with an option ARM that we just really don’t like, we can try and refinance to a more traditional type of loan.

Let’s say we’re six years into a 30-year mortgage with a 5.17% interest rate. We’ve grown a lot as a person over the last six years, and this includes improving our credit score and earning a couple raises at work. Those changes, combined with lower interest rates in general, mean that we could now refinance our home loan at the quite attractive interest rate of 4.05%. Refinancing might also start the 30-year clock over, which means we’ll be making mortgage payments for an extra six years, but we’ll be paying a lot less every month, and significantly less in total.

Related or Semi-related Video

Finance: What is Adjustable-Rate Mortgag...17 Views

00:00

Finance allah shmoop What is adjustable rate mortgage or arm

00:08

Well here's an arm and here's a leg and that's

00:11

What Renting the money to buy a home costs you

00:14

Yeah Okay Eight r m stands for adjustable rate mortgage

00:17

The rate well that's The interest cost of the money

00:20

or the cost of renting that money to buy the

00:23

home Well the rate isn't it fixed in this case

00:26

like five point seven percent for thirty years Where you

00:28

know in advance that your monthly payments going to be

00:31

nine hundred forty three bucks a month or whatever it

00:33

is that would be a fixed mortgage a fixed number

00:37

You can count on it for all three hundred sixty

00:40

payments And then the house is all yours So that's

00:43

fixed then what's adjustable like yes the interest rate changes

00:47

But how does it change Well in a standard arm

00:50

there is some global standard on which the rates are

00:53

often price like lie bore the london interbank borrowing offering

00:57

rate It's one of the key things that price is

00:59

the cost of renting money all around the world with

01:02

the actual rate of libel or is generally reserved for

01:04

banks like super cheap cost of renting money to banks

01:08

who are very likely to pay back the money with

01:11

no hassle that rate is more or less what banks

01:14

pay for running the money along with blue chip customers

01:16

in real life The banks then mark up a premium

01:19

on top of the rate that they're paying to rent

01:22

the money to themselves And then they resell or re

01:26

rent that money teo their prized customers So the pricing

01:30

of bank my views in renting money to joe six

01:33

pack could be something like lie boer plus three percent

01:37

or three hundred basis points So if libel or is

01:40

it didn't say two and a half percent today the

01:43

adjustable rate might be five and a half percent and

01:46

all that's great honor given alone It might mean that

01:48

for a while you're paying seven hundred twelve dollars a

01:51

month for your house payment wonderfully cheap and in fact

01:54

banks market these low rates initially to help people be

01:58

able to afford tto by that new home and live

02:00

of the dream You know the american dream usually with

02:03

an arm there's a teaser rate that starts really low

02:07

Like at live or live or plus ten basis points

02:11

or something like ridiculously cheap for six months or a

02:14

year something like that Then it has an incremental set

02:17

of step ups in interest costs and venit adjust with

02:21

the markets usually upward maybe upward by a lot Remember

02:26

there's a reason it's called a teaser rate but then

02:29

if we get inflation or a you know just bank

02:32

nervousness for there are weird effects from brexit or the

02:35

volume of transactions going through london or something weird happens

02:39

Well then the liquidity drops and interest rates rise So

02:44

now lie board goes up and up and up to

02:46

four and a half percent and wealth contractually in your

02:50

mortgage paperwork you have to pay live or plus three

02:53

hundred basis points no matter what So now that's seven

02:56

and a half percent interest on the dough you borrowed

03:00

and well we're that toe happen It's likely that your

03:02

monthly payment has skyrocketed from seven hundred twelve dollars a

03:06

month is something more like twelve hundred dollars a month

03:09

or more Can you handle that big of a payment

03:11

Well have you done a fixed rate loan at nine

03:13

Hundred forty three dollars a month Well you'd still be

03:15

paying on that number but you rolled the dice with

03:18

an arm and now you owe big bills There go

03:22

that arm and a leg thing we warned you about 00:03:26.033 --> [endTime] eh

Up Next

Finance: What is Adjustable Rate Preferred Stock?
15 Views

What is Adjustable Rate Preferred Stock? Adjustable rate preferred stocks pay dividends that are based on interest rates. Usually these are the rat...

Find other enlightening terms in Shmoop Finance Genius Bar(f)