Here are Four Common Types of Refinance Mortgages: 1. Fixed Rate Refinance If you chose an adjustable rate mortgage (ARM), you may find that refinancing to a fixed-rate mortgage is a good idea if interest rates are significantly lower now. When refinancing to a fixed rate mortgage, you can lock in the current, lower interest rates and pay less in interest and also have lower monthly payments. However, there are usually closing and transaction fees associated with refinancing debt and these costs must be weighed against the long-term benefits of doing the refinance. Again, you should consult with a mortgage professional to make sure that a refinance mortgage represents a sound financial decision. Another option is to change the terms of the fixed rate mortgage. Say your first mortgage is a 30-year fixed rate mortgage, refinancing to a 15-year fixed rate mortgage for example may increase your monthly payments but end up reducing the amount of interest you will ultimately pay in the long term. This results in your principal being paid off more quickly and increases your home equity. Refinancing to fixed-rate mortgages is most helpful for homeowners who intend on staying in their homes for several years (usually at least 10 years). 2. Adjustable Rate Refinance ARMs are attractive to some homeowners because they traditionally have a lower initial interest rate than many fixed-rate mortgages. However, the interest rate for ARMs will fluctuate over time along with changes in market conditions. Refinancing to ARMs may be a good idea for homeowners who wish to do away with their high interest rate payments on the fixed-rate mortgage. Some borrowers who had an ARM as their first mortgage also choose to refinance from their first ARM to another ARM in order to get a lower rate. ARMs can be risky. Interest rates for ARMs vary depending on the lender and the interest payments will fluctuate. If a homeowner is planning on living in his or her current home for more than just a few years, affixed rate mortgage may offer more financial security. 3. Cash out Refinance Cash-out refinance mortgages involve getting a new, larger mortgage to get extra cash to pay off debt whether it is a school loan, automobile payments, costs associated with home improvement, among other things. If you get a $225,000 cash-out refinance mortgage, the existing balance on your first mortgage can be paid off, and the homeowner has access to an additional $100,000 in cash. Typically, cash-out refinances are limited to a loan to value ratio of 80 percent. Lenders that offer a higher loan to value ratio will usually ask for higher up-front fees. Cash-out refinances can also be risky. You may incur extra tax liabilities when borrowing against your home. Borrowers may also increase their debt if they don't manage their spending habits effectively. 4. No Closing Cost Refinance No-Closing Cost Refinance loans usually require the borrower to pay less in upfront fees relative to the other refinancing options. It may be beneficial to this type of refinance loan if the market interest rate is lower than your existing rate by 1.5 percentage points of more. However, many lenders will waive the upfront cost but incorporate an extra cost to the borrower in the form of a yield spread premium that is added on to the back end of your new refinance loan. Make sure lenders provide you full disclosure about both upfront and hidden costs! *If you would like to speak to a licensed loan officer to learn about mortgage refinancing process, call John Armellino. |