Refinance
Frequently Asked Questions (FAQ)
Simply put, mortgage refinancing means switching out of your current mortgage and replacing it with a new one. The most common reasons for refinancing include a desire to get a better interest rate than the one you initially signed on for – thereby lowering your monthly mortgage payments – or to use the money you save with your new rate to pay off credit cards and other high interest debt. Refinancing with a new fixed rate mortgage can be a smart move financially if the situation and the type of loan are appropriate for you.
How low should mortgage rates be before you consider refinancing? Experts say to consider it if the available refinance rates are two to three percent less than the one on your current home loan. Also, refinance mortgage payments only if you plan to be in your current home for a while (at least two more years) to make sure that you offset closing costs and fees.
Refinancing is an important financial decision for you and your family. To “crunch the numbers” on mortgage refinancing rates, use this handy mortgage calculator to get a better picture of how much you can save before going to see a mortgage refinancing specialist.
The reason to choose a fixed rate mortgage is simple: the beautifully boring predictability of it all! When you refinance your home using a fixed rate mortgage, you know exactly what your payments will be for the life of the loan. You also don’t have to worry about the volatility of interest rates.
Of course, if you lock your mortgage in at a fixed rate, there’s always the chance that the interest rate will fall below the rate of your loan. If this occurs, you’re going to be stuck with the rate you have (unless you wish to refinance again – which leads to additional closing costs.)
The most common fixed rate mortgage loans come in 15, 30, and 40-year terms. Here are the basic pros and cons of each type of fixed rate mortgage loan:
15-year mortgage -- Pros: You’ll find the best interest rates with a 15-year mortgage and build equity in your home faster. Cons: Of course, there are higher monthly payments, and you will likely need a larger down payment.
30-year mortgage – This is the most common type of fixed rate mortgage. Pros: Monthly payments will be lower than a 15-year mortgage. Cons: You won’t find the same great rates associated with a 15-year term and it will take you longer to build valuable equity in your home.
40-year mortgage – Pros: lower monthly payments. Cons: higher interest paid over the life of the loan. This is the choice of many who can’t afford a large down payment.
With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.
Some of the ads you see are for adjustable rate mortgages (ARMs). These loans may have low rates for a short time--maybe only for the first year. After that, the rates may be adjusted on a regular basis. This means that the interest rate and the amount of the monthly payment may go up or down.
With an adjustable-rate mortgage, your future monthly payment is uncertain. Some types of ARMs put a ceiling on your payment increase or interest-rate increase from one period to the next. Virtually all types must put a ceiling on rate increases over the life of the loan.
The rule of thumb is that refinancing costs are recovered within 2-3 years. If you plan to sell the house or pay it off shortly, you may not want to refinance because you will not recover the costs. Obviously, this depends on the up-front costs and the savings with the new mortgage. |
