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Refinancing at Higher Rates

Aug 17, 2007
Like The Federal Reserve called FED in United States there is a body in every country, which provides the country with a firm, yet elastic monetary and financial system. This institution conducts the nation's monetary policy and regulates all the workings of banks etc. Its main purpose is to control the financial market and make it more stable. Now we will see how this body affects the refinancing rates.

Generally, Fed controls the interest rates. As Fed raises interest rates, rates of short-term mortgages such as home equity loans and adjustable rate mortgages also increases. Refinancing is thus a side effect of increasing and decreasing graph. It is the supply and demand, which makes these rates rotate. When the economy is healthy and borrowing is high, interest rates increase. When the economy becomes spongy and there is less borrowing, interest rate declines. It is then people who have borrowed during high interest rates move towards refinancing. When banks lend or borrow funds a basic interest rate is charged called "fed funds rate". This is a short-term rate for up to 2 years. When these rates rise or fall they directly affect short term mortgages such as adjustable mortgage rates and home equity rates thus affecting the number of people moving into refinancing.

A decline in short term rates causes more and more people to borrow. These in turn result in inflation, which Fed controls by increasing rate of short-term mortgages. This rise and fall affects the people having adjustable mortgages. These mortgages have an initial fixed low interest rates but afterwards these may rise or fall according to the market. Traditionally, long-term interest rates have been an all time low. So in order to avoid any hike in the prevailing interest rates, people having adjustable rate mortgages have been refinancing into fixed rate-mortgages.

Generally the concept of refinancing comes when the new interest rates are lower than you existing rates. But then a situation comes when mortgage rates are rising. At this time people think that it is not the time to refinance at a higher rate. But in some cases, the move to a higher rate mortgage could make sense. Most people now a days take refinance as a dynamic decision. But if the graph of interest rates does not decline, one might think that refinancing just does not pay. But refinancing to a higher rate may be a beneficial under certain circumstances.

Consider a situation when a person has an old loan and no money to pay off and there are certain other expenses such as bills or home renovations that need prime attention. Then refinancing at higher rate can come to your help. Here bills could be consolidated, home equity could be refinanced and monthly expenditure can be cut at a higher rate refinancing.

Another possibility that attracts refinancing at a higher rate is an adjustable rate mortgage. The rate and installments are normally very low at the initial stage of an adjustable rate mortgage. However, afterwards the rate can vary significantly. So prior to a four or five year fixed period, it would make a good decision to refinance to a higher rate prior to the fixed period expiring.
About the Author
Refinance is a key part of business development strategy used by Nazir on a daily basis. Proper use of this financial instrument depends very much on the quality of information upon which any refinancing decisions are based. For your better decisions, visit refinance now at http://www.123refinancenow.com
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