Finding the Best Mortgage Interest Rates: Learn Your Financial Terms

by Sean Bryant on December 20, 2013

Mortgage Interest RatesYou almost have to be a psychic to be able to accurately predict when the perfect time is to refinance your mortgage so that you can get the best mortgage interest rates. Therefore, if you can find a great deal that ends up saving you money in the long term, you should go or it. You have nothing to lose by taking the good deal, and you potentially have thousands to lose by passing on it.

So what rate would you actually need before refinancing makes sense? This is no simple answer. Your interest rate isn’t the only thing to consider when you are shopping or a new loan.

Refinancing is not free, of course. You must take into account the bank fees, the bills for a new appraisal and inspection, your lawyer’s fee, and more. There are a lot of different numbers to take into consideration to find out exactly how much you’ll save (or lose) by refinancing on a mortgage loan. You’ll need to know how much you’ll save on your monthly payments, as well as your new interest rate and home equity build-up.

Using a refinance calculator can help you decide if refinancing is the right choice for you at this moment. If you can lower your monthly mortgage payment and offset the costs of refinancing in a short amount of time, you should probably consider refinancing. A refinance calculator can provide you with an estimate of your monthly mortgage payment under a new loan, the break-even point, and your future savings of the new loan if you can input the value of your current loan amount as well as the refinance amount of your new loan.

Here are some terms that are important to understand when considering refinancing and assessing your mortgage interest rates:

Down payment

This represents the amount of money you will actually have to put “down” on your house in cash, without a loan. A word of advice is to make sure to have some cash let aside for unforeseen maintenances or other emergencies.

Interest rate

This actually covers the interest for the loan you are about to get. This can vary, based on your geographical location, the amount of your down payment in relation to the total cost of the loan, and your credit score.

Property taxes

Most mortgage payment calculators include projected taxes on your residential property. This represents the annual tax due to be paid on housing property. In this case, the amount due is actually based on the overall value of the residence.

Homeowner’s insurance

This is also called a hazard insurance. It is explained by the fact that the majority of lending companies require some form of insurance in case of a variety of events may damage your residential property. Such events include lightning, burglary, storms or vandalism. Liability coverage is in fact included on all insurance policies for the homeowners, helping to protect them against lawsuits that involve injuries or damage taking place on and off the actual property.

Mortgage insurance

Mortgage insurance is mostly needed for borrowers who have a down payment of 20% or less of the overall price of acquisition. The insurance protects the lender from a number of losses that can happen when the client actually defaults on their mortgage loan. This is also called PMI (Private Mortgage Insurance).

HOA dues

Characteristically, residential owners who are buying townhomes or condos will have to pay a series of HOA fees, which is an amount due for payment to homeowners associations. These are meant to cover mutual services or conveniences within the property, like snow removal, hazard insurance, garbage collection or landscaping, to name just a few.

Loan term

This is defined by the length of time it will take you to pay off the loan and it can be anywhere between 15 years to 20 or 30.

If interest rates have gone down or are expected to rise, if your credit score has improved, or if you’d like to switch to a different type of mortgage, these can all be good reasons to refinance. Before making a decision, however, do your due diligence by shopping around, weighing the pros and cons of different fees that may not be obvious, and talking to your current lender. Your home might be your most valuable financial asset, so any decisions concerning refinancing should not be made until you have all the information you need to make a smart decision.

Essentially, refinancing your mortgage means you are paying off your existing mortgage and starting a new mortgage. Some homeowners decide to combine their current (primary) mortgage with a second mortgage. You have a lot of different options, so be sure to do your research before signing anything.

Lowering Your Interest Rate

The interest rate on your mortgage is influenced by how much you pay on your mortgage each month. A lender may also be able to give you a lower interest rate because of changes in the market or an improvement in your credit score. This is important because a lower interest rate also may allow you to build equity in your home more quickly.

Compare the monthly payments (for principal and interest) on a 30-year fixed-rate loan of $200,000 at 5.5% and 6.0%. The difference is considerable.

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Sean Bryant

Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and he wife are avid world travelers. He enjoys spending time with his daughter Colette and dog Charlie.
  • I did a lot of research before buying my house. We knew a lot about home buying terms and had very solid estimates about how much it would all cost. If we hadn’t we would have been in trouble!

    • It’s too big of a purchase not to do as much research as you can. Makes you a more informed buyer.

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