How are Refinance Rates Calculated
When homeowners decide to refinance. they frequently assume that the only costs of a mortgage are the interest rates. In reality, the interest on the loan is just one fee that makes up the total refinance rates. And to be perfectly honest, refinance rates can be quite arbitrary, as they depend on several factors including the lender's rules, the credit rating of the customer, and the going interest rate. To clear up some of the confusion, we should take a look at how refinance rates are calculated.
Truly, the biggest factor in determining refinance rates is the economy. Interest rates are set by the Federal Reserve and from there, percentage points are tacked on accordingly by financial institutes. The rate the lenders advertise is generally the best possible interest rate afforded only to their best customers. Regardless, if the economy is poor, interest rates will be high, and if the economy is booming, interest rates will be lower. But remember, this is only the first factor in determining your actual finance rates.
Next, the bottom rates will vary depending on the mortgage lender. For example, a bank or credit union might offer one interest rate, while a finance company might expect a point or two higher than the banks. Yet, if you deal with individual lenders, their rates are typically higher again. There is always a hierarchy of the basic interest rates, and this means that the bank might advertise four percent, but when you get to the private lenders, they are charging twelve percent. Each level starts out with a different interest rate.
Once the interest rate guidelines are set, the person
who needs the money will influence their own individual rates. Just because the bank offers four percent does not mean everyone gets that rate. For instance, if the person applying for refinancing has a speck on their credit report, that will invariably cause the actual rate to be higher than someone else. The worse someone's credit, the higher the base interest percentage. So, your ability to borrow directly impacts how the refinance rates are calculated.
The next factor in calculating refinance rates are the processing fees, closing costs, and any commissions owed for completing the refinance. Again, banks and other financial institutes have different ways in which they handle mortgage agreements. Sometimes, processing fees are waived in favor of higher interest rates, while other lenders waive certain fees to attract new business. Private lenders often provide a lump sum fee which includes lawyer's costs, administrative fees, such as verifying ownership of the property, and a commission to complete the deal. All of these fees are components of the true cost of refinancing a mortgage.
Lastly, if you are refinancing during the term of another mortgage, in other words, you are breaking an existing agreement, you are going to have penalties to pay. That means that when the new mortgage holder pays out the existing mortgage, the total amount will be much higher than the mortgage owing. The lender may have a graduated schedule of interest depending on the amount borrowed.
As you can see the economy, the interest rates, the lenders, the borrower's credit, the closing fees, and any penalties, all impact how the refinance rates are calculated.
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