If you are concerned that you will not automatically qualify for a low interest rate, you may want to either save more of a down payment or look into a government insured loans, such as an FHA insured loan or a VA insured loan, which encourages lenders to provide lower rates.
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Your first decision may be deciding whether you qualify for a fixed rate loan
or an adjustable rate loan:
- A fixed rate loan means that the interest rate will not change throughout
the life of the loan. The monthly payment you have the first year of the loan
should be the same as the monthly payment the last year of the loan. A fixed
rate provides you with the stability of knowing exactly what your payments
will be, but can leave some people dissatisfied if rates drop substantially
over the years as they repay their loan. If this happens you have the option
of going through the loan process again and refinancing your mortgage to take
advantage of the lower rate.
- An adjustable rate loan has an interest rate that fluctuates with certain
indexes. An example of such an index would be the average rate of a one year
Government Treasury Security. An adjustable rate loan does not offer the security
of a fixed rate, but it generally has low introductory rates, and, if the
rates drop, a homeowner with an adjustable rate can wind up payment less in
interest than a homeowner with a fixed rate. Adjustable rate loans have predetermined
periods between adjustments in the rate. These periods can be as low as one
year or as high as five years.
Some mortgages are strictly fixed rate or adjustable rate, while others can go under either heading. If you are getting a fixed rate, your mortgage company should be able to show you in advance exactly what you repayment schedule will entail. Also, if you know that you are interested in a fixed rate, you can use a mortgage calculator to get a clearer picture of what your monthly payments will look like. An adjustable rate is more complex because the amount will change as the rates changed, but your lender should still be able to explain to you exactly how your monthly payment will be determined.
Refinancing for a larger amount than your original loan
The time you Refinance may be a good time for you to take out some additional money for home improvements. In so doing, you can add to the vaue of you home. An important factor in this decision is the tax status of the interest you will pay on your new loan. This status depends on how the money is used. If your cash is used for home improvements, the money is considered acquisition indebtedness and you can make a tax deduction. If the money is used for other purposes, you may not qualify for a tax deduction. Refinancing is typically a great option if you intend to stay in your house for at least a few more years; however, make careful considerations of the tax issues involved with taking out a larger loan in the process. A quaified mortgage broker can help work out these figures with you. Often times, because rates are so low today, regardless of how the money acquired through the loan is spent, you stand to make great savings.