Mortgage Refinance Options

In simple terms, a mortgage refinance is the assumption of a new mortgage, while retiring the old, to capture a lower interest rate. There are two main types of mortgage loans to consider when refinancing your home including: adjustable rate mortgages (ARM) and fixed rate mortgages (FRM).

An adjustable rate mortgage is a mortgage that features predetermined adjustments of the interest rate at regular intervals based on an established index. The interest rate is adjusted at each interval to a rate equivalent to the index value plus a predetermined margin or spread over the index. These spreads or margins are usually subject to per-interval and to life-of-loan interest-rate or payment rate caps. Simply put, ARMs are loans with interest rates that change. A fixed rate mortgage is a loan whose rate is fixed for the life of the loan.

There are five common reasons why borrowers opt for a mortgage refinance. Borrowers typically refinance for the security of a fixed rate loan, to lower their monthly payments, to take cash out of the home’s equity, to eliminate mortgage insurance or to move to an adjustable rate mortgage.

 Adjustable rate mortgages can be beneficial for homeowner’s that are interested in: lowering their monthly payments or taking cash out of the home’s equity, or for short-term savings. Fixed rate mortgages can be beneficial for homeowner’s that are interested in the security of a fixed rate loan, homeowner’s that would like to consolidate debt, and homeowner’s interested in getting cash out. Fixed and adjustable rate mortgages can be beneficial for homeowner’s interested in eliminating mortgage insurance. Overall, it pays to refinance your mortgage if:

• You can lower your interest rate
• And/or Lessen your loan amortization period
• You’ll keep the property and loan long enough to recoup the costs of financing

While each type of mortgage refinance loan has its benefits, there are also risks associated with each type of loan. According to the Board of Governors of the Federal Reserve System in Washington, DC, ARMs may start with lower monthly payments than fixed rate mortgages, but monthly payments can increase dramatically, even if interest rates don’t increase. Additionally, borrowers may only see a slight decrease in payment amounts, but it is a good possibility that payments may not go down at all – even if interest rates decrease. In some cases, you could end up owing more than you borrowed, even if you make all payments on time, and you may end up paying a penalty if you decide to pay off your ARM early to avoid higher payments.

While fixed rate mortgages offer the luxury and safety of knowing that your monthly payments will not increase over the next 10-30 years, depending on the type of fixed rate mortgage (most common are 15-year and 30-year), they typically have much higher monthly payments than adjustable rate mortgages.

Once you have mulled over your mortgage refinance options and weighed the pros and cons of each, you may be wondering how to get started on your mortgage refinance. First, savvy homeowners typically shop around for the best rates and lowest closing costs before shopping their current lender. This way, you can present the best deal to your current lender and they will more than likely attempt to top it.

Secondly, decide if you would rather complete your mortgage refinance in person or online. It is important to note than refinancing online can save you time and even money. Many lenders offer interest rate and closing cost discounts for online applicants as it limits the cost of lender overhead required to make in-person mortgages.