Refinancing a home mortgage is a great way to get a new mortgage that will better fit your personal finances. There are a few options you should consider when looking for a home refinance, as well as methods that will earn you the best possible loan.
You have two very simple interest rate options for refinancing a home loan:
1. Adjustable rate mortgages – Also known as an ARM, an adjustable rate mortgage will allow you immediately lower interest rates compared to a fixed rate loan. Adjustable rates rise and fall with market conditions, and it is often the case that an ARM will adjust as many as 2-4 times a year, depending on monetary policy.
2. Fixed rate loans – Many people who get a home refinance are actually seeking to get rid of an adjustable rate mortgage in favor of a fixed rate loan. A fixed rate loan is higher interest than an adjustable rate, but if rates rise, an ARM will quickly be more costly than a fixed rate loan. For this reason, many people go with fixed rate loans for certainty.
A traditional home loan is written with a 10, 15, 20, or 30 year repayment term, meaning that the home is fully paid off at the end of the repayment period. With a home refinance, though, you probably aren’t refinancing your home during a perfect year. So, basically, you might have 23 years left on the loan and the lender is only willing to do a 15 or 30 year loan, which are both either too short or too long of a lending period. For this situation, you may find an alternative loan to be appropriate.
Alternative loans – Also known as an interest-only loan, an alternative loan is one where you have the option to pay just the interest, the interest plus a small amount of principal, or a monthly payment sufficient to meet your pay off date. While these have no required pay off time, you can, with the help of your mortgage broker, sculpt a payment amount that will allow you to pay off a home in the amount of time that you would like to pay it off in. For example: An interest-only loan may have a payment of $600 monthly, which pays only the interest on the home. Alternatively, you may find that by paying $716, for example, you can pay off the home in exactly 23 years—the amount of time you had on your original loan.
Traditional loans – Traditional 15- and 30-year mortgages can also be worked to fit within your own repayment goals. For example, you may find that a 15-year home refinance at a lower rate has the same monthly payment as your older 30 year loan, even though it will take less time to pay it off. Otherwise, you may find that signing up for a 30 year loan but paying an extra $80 a month will allow you to pay off the home in 20 years, the exact amount of time you wanted to have. If this is the case, you should always make sure that the lender does not charge a “pre-payment penalty,” which is a fee assessed on borrowers who pay more than the minimum monthly payment.
HELOC for flexibility
Along the same lines as an alternative interest-only option is a home equity line of credit, which is a great refinancing mechanism for those who may want to use their home equity as a source of credit in the future.
HELOCs can occasionally be found with a fixed-rate, however most are issued only as an adjustable rate loan. The benefit, though, is that HELOCs allow you to borrow whenever and however. It is common for wealthier homeowners to use a HELOC to refinance their loans and to remain liquid. Having a large credit line available at all times allows them to spend money without cash flow problems, and to take advantage of thick tax credits for home mortgage interest, regardless of what the purchase is for.