SINCE interest rates fluctuate in the banking and financial market in the state of Colorado as per policy revisions of Federal Reserve (Fed), the cost of mortgage loans too fluctuates correspondingly because the ‘cost’ of a loan is the interest you pay on it. If you have taken a mortgage loan at an interest rate higher than current rates, you are probably paying more than necessary in the present market conditions. You can bring down your monthly recurring cost of your mortgage if you take a new loan to pay back the outstanding portion of your earlier mortgage and then make monthly payments to pay back the new loan.
Real Estate Broker in Colorado
The property you mortgage for the new loan is the same that as the one for the original loan you had taken. This new loan is called ‘mortgage refinance loan’, the term derived from the fact that it is ‘refinancing’ a mortgage that was already financed earlier. Note however that lower interest rates need not be a justification for refinance: even a higher rate may make sense if you want to extend the duration of your existing loan by reducing your gross monthly payments. In Colorado, many mortgage refinance choices are available but you have to consider certain factors specific to you before you decide whether to opt for mortgage refinance – and, if yes, what type of refinance loan is the best for your needs.
Factors to consider
There are many lenders and brokers registered in Colorado and each of them will jump at the opportunity to serve you. They are in business with many customers, but you are special for yourself. It would therefore be imprudent to leave the responsibility entirely to them; you yourself must do some background work to ensure you are getting the best possible deal.
The first factor to consider is: what do you want to gain from your mortgage refinance loan? The refinance must make economic sense. You must decide whether you want to lower your monthly repayments, reduce or expand the duration of your mortgage liability, or simply take advantage of the lower rates prevailing in the market without changing the net duration of your liability (this could get you some instant cash).
Once you decide what you want your mortgage refinance loan to do for you, the next factor is: the type of refinance best for you. This depends entirely on your own present and anticipated financial situation and the number of years you want to keep owning the mortgaged house. Let’s look at the basic types of mortgage refinance loans available. There are ‘fixed rate mortgage (FRM)’ and ‘adjustable rate mortgage (ARM)’ loans. There are other classifications too, such as ‘conforming’ and ‘non-conforming’ loans. For the purpose of this article, suffice it to say that conforming loans are most popular in Colorado and that non-conforming’ loans come at a one or two percentage points higher than conforming loans. Non-confirming loans are also referred to as ‘jumbo loans’.
FRMs and ARMs
FRMs, as is obvious from the name, come at a fixed interest rate throughout the life of the loan. This does not mean your net cost of loan per month is same every month. The fixed rate is charged on a reducing balance basis, i.e., the principal amount keeps reducing every month as you make payments. The same interest rate applicable to progressively reducing principal amount means that the gross interest you are paying each month is lower. However, by a complex arithmetic, the reducing balance principle is computed to arrive at a fixed monthly outgoing. These monthly payments may also be called ‘equated monthly installments’. FRMs are advisable if you know that your income will remain steady or, better, increase through the medium-to-long term The advantage here is that you will be paying the same amount of money throughout the life of your mortgage, thus beating the almost certain inflation that will happen through the next 10, 15, 30, 40 years, i.e., the duration of your refinance loan.
ARMs, on the other hand, come with a variable interest rate after a pre-specified number of initial years. For example, a 15-year, 3/1 ARM would mean that the loan has a repayment period of 15 years, you will be paying a relatively low rate in the first three years, and then the rate will be revised (usually increased) every year thereafter. The annual increase will factor in the prevailing rates at the time but there may be an add-on to compensate for the low rate you paid in the initial years, i.e. three years in our example. ARMs are good if you think you should spend less money now and that you can pay more after the specified number of initial years. Usually, FRMs are preferred by new entrants in the job market, who know their income will rise as they grow older. Since most first-time home buyers in Colorado are in the younger age groups, ARMs are more widely availed of in this state.
Selecting your refinance loan
The above is for your background knowledge. To determine more concretely which loan type is suitable for your needs, you should visit websites of lenders or brokers, which you will find through a simple search of the internet using appropriate search words such as, say, ‘mortgage refinance in Colorado’. Almost all such websites have online calculators, into which you will be asked to type relevant information – such as the terms of loan you want, how many years later you want to sell your property, your credit profile, and so on. The online calculator will then throw up different loan options complying with the parameters you specified. Thus, you will have a reasonably good idea of what you can expect from the mortgage refinance market in Colorado.
Next you contact at least two lenders or brokers (registered brokers are as reliable as lenders; in any case, they will only broker intermediate you and the lender), and get offers from them. There will be small differences between the final offers from the real-world operators and the estimates you go from the online calculators. Before you take the plunge, however, get in writing the upfront fees and other costs you have to incur. If the amount of refinance loan you are seeking is small, or if you want it for a relatively short duration, the upfront fee may disrupt your calculations based only on the interest rate. The annual percentage rate (APR) of your loan is therefore more important than the interest rate as it tells you the total cost of the refinance in the course of a year.
Mortgage refinance need not always be sensible. It depends on specific cases and specific situations. Sometimes, even a lower interest rate may not justify a refinance and, sometimes, even a higher rate may. Therefore, the most important decision you must take is what you want your refinance to do for you.