Since the disappearance of Malaysia Airlines Flight 370 over a week ago, the news seems transfixed on finding out where the plane might have crashed as well as what happened after contact was lost. Another subject that the media has been focused on is the crisis going on in Ukraine. Though it does not involve American citizens, the outcome can have drastic consequences that would be felt worldwide. Despite the number of people in the United States who are following these stories every day, others are more concerned about topics that hit them directly in their gut; specifically in the wallet. Homeowners who are paying off their mortgage but realizing they need extra money are more concerned on how to resolve this situation. One suggestion would be to refinance their current mortgage with a new one that can help kill two birds with one stone.
This new mortgage can help lower monthly payments and provide an opportunity to gain access to extra cash. Yet, this works only if a homeowner understands the factors that affect refinance loans and how to use that knowledge to their advantage. One such factor is known as interest rates. These rates can make the difference between acquiring a refinance mortgage that is beneficial and one that can make your situation worse. To help enlighten you on this subject, let’s look at what refinance interest rates mean and how knowing about the different types can save a borrower money.
What do Refinance Interest Rates Mean to a Homeowner?
While it is understandable why an owner of a home wants to start refinancing as soon as possible, it would be beneficial to a homeowner what is meant by these rates. An interest rate deals with a rate that concentrates on the interest that is paid by the debtor (borrower) for being able to utilize the funds loaned from a creditor (lender). To clarify this in another way, the interest rate represents a percentage of a particular principal that is paid for a specific amount of times per pay period (usually paid per year). Let’s say, for example, a smaller company realizes that in order to stay competitive they need to acquire new assets. To accomplish this goal, the company will approach a bank in the hopes of getting money that will help them obtain these assets. In return, the bank would set up a schedule that both parties agree on where the bank gets interest on the agreed interest rate and delays the use of the money and lends it to the homeowner. When looking at refinance interest rates, there are two types of rates that can help those who want a loan obtain the rate that is the most beneficial.
How Nominal Interest Rates can affect a Mortgage
One would think that when talking about these rates that it is cut and dry. By this I mean that whatever the interest rate is for a particular day that is the rate to focus on. However, this is not the case and when agreeing to pay back a given rate, each can provide the homeowner with an outcome that is different from the other. The first rate is known either as the nominal rate of interest or nominal interest rate. When individuals talk about interest rates, they are generally discussing about this type of rate. When using this type of a rate towards a refinance, it is not taking into account the effects of inflation. It is important to realize this in that over time, if inflation drives the interest rates up, this will cause your monthly payments to increase as well.
How Real Interest Rates affect the Real Yield of a new Mortgage
Once knowing what the nominal interest rate is, a lender will then factor in what percentage of inflation is to reflect the real yield that goes to the lender while coming up with the real cost of funds to someone acquiring a loan. The formula used looks at what the nominal interest rate is minus inflation (actual or expected) that will equal what the real interest rate is. Being able to calculate and determine this will give the homeowner a better idea of the expectations of the new mortgage in order to plan accordingly.
In the economy of today, investors realize how the stock market is like a roller coaster ride. Ups and downs should come as no surprise but the duration of each can throw some curve balls as well as how high or how low the market can go. The best one can do is to try and plan accordingly when each occurs and make the most out of the situation. With refinancing, the same applies as changes in the market influence what homes are going for as well the interest rates on loans. Knowing about what refinance interest rates refers to can impact not only when a good time to refinance is but the types of interest rates to account for. This can maximize the amount of money a homeowner obtains while saving money on repaying the refinanced mortgage.