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How Does Refinancing Work?

Whenever there's a significant drop in the prime lending rate, there's a spike in loan refinances, with homeowners eager to capitalize on the potential benefits. So, what can a low prime lending rate mean for you and your home mortgage?

First of all, the prime lending rate is the interest rate banks charge one another for short-term loans. Used as a baseline to determine the interest rate paid on savings accounts and CDs, the prime lending rate also determines the interest rate charged on loans. In a nutshell, whenever the Federal Reserve lowers the prime lending rate, they're encouraging consumers to spend money; while the interest rate paid on savings accounts takes a hit, home mortgage rates become more of a bargain.

When you refinance your home mortgage, you're essentially replacing your existing home loan with a new one. Refinancing may allow you to adjust the term of your loan (from a 30-year to a 15-year loan, for example), reduce or stabilize your interest rate, or decrease the amount of your monthly mortgage payment. In the long run, a home mortgage has the potential to save you tens of thousands of dollars in interest.

How does refinancing work?

For most people who have already been through the home loan process, the steps involved in a refinance are pretty simple. Here's a basic overview:

  • Compare interest rates. To streamline the process, it's a great idea to talk to your current mortgage holder first. In addition to possibly offering a competitive interest rate, he or she may also clue you into special discounts or waivers of certain fees. When shopping for rates, be sure that you're getting an apples-to-apples comparison (i.e. interest rates for a 15-year, fixed mortgage) and get all of the information about fees and closing costs.

  • Compare the costs. As with your original home loan, there are charges associated with a mortgage refinance, including origination and filing fees, appraisal fees, and points.

  • Costs vs. benefits. To determine if a refinance is right for you, compare the cost of the loan with the potential long-term savings. While it may cost $3,000 to finance, you could save tens of thousands over the course of your loan.

As with any financial decision, do your homework before taking the leap. While the rate may seem low, a home refinance may or may not be in your best interests. We invite you to explore this site and learn everything you need to know about how does refinancing work.

How Does Refinancing Work




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