Home Mortgage Refinancing – How Rates and Terms Affect Overall Cost
Mortgage Loan

Home Mortgage Refinancing – How Rates and Terms Affect Overall Cost

Two of the most important aspects of home mortgage refinancing are the interest rate and the length of the repayment period. These two factors drive the overall cost of the loan you acquire.

When looking at home mortgage refinancing, rates and terms of the loan are critical.  The rate is the amount of interest that you will be applied to the unpaid principal during each loan payment period, while the term is the length of time before the loan is paid off.  It is important to understand how various combinations of these two factors affect the total cost of your loan. Make certain that you have a complete understanding of not only the monthly payment that will be your obligation, but the cost of the entire loan over the course of the loan. 


There are some common buzz words associated with obtaining home refinancing.  It is important that you understand the meaning of the terms as the loan broker or the lender defines them.  If the definition is not standard usage as you understand the term, you may find yourself with some very wrong assumptions about the mortgage documents that you signed. For example, you should at a minimum define adjustable rate mortgage, mortgage term, Option ARM and negative amortization.  Be aware of alternative terms used in the documents and be certain that you understand the impact these words and clauses will have on the length and cost of the mortgage loan.


An adjustable rate mortgage grew in popularity during the 70s and 80s when fixed rate mortgages were climbing sky high.  The adjustable rate mortgage allowed more home buyers to qualify for a loan, because the interest rate and thus the initial payment amount was lower. If you select the ARM for your home mortgage refinancing, you will typically pay less for 6 to 24 months after which your rate will increase at a rate tied to some outside index. There may or may not be a cap on how high the adjusted rate can go and how often it can be adjusted.

Fixed Rate

A fixed rate is quite common when searching for home mortgage refinancing.  This type of rate benefits those who have a stable income, plan to stay in the same home for at least 3 years, and who need to be able to plan ahead for expenses in the foreseeable future. The fixed mortgage rate is set at the onset of the loan term and does not change during the term.  It tends to be somewhat higher than an adjustable rate mortgage since the lender has a slightly higher risk of loss with this type of loan.

Negative Equity

Negative equity loans are more likely to be seen in new home mortgages than in home mortgage refinancing loans, since the concept is relatively new. Essentially, the negative amortization loan adds the unmet portion of interest and principal payments each month to the principal balance.  This means that at the end of the grace period which can be only a few months, the borrower ends up owing more in principal than was on the original loan.  A few individuals can take advantage of this type of loan but it requires self-discipline and an understanding of strict budgeting.

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