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Understand Your Options
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Refinancing
What Type of Loan Should You Get?
The type of mortgage loan you select will depend on how long you
expect to continue living in your current home, your reasons for
refinancing, and the amount of the monthly payment you can comfortably
afford.
Fixed-Rate
Mortgages
When interest rates decline, some homeowners choose to refinance
from an adjustable-rate
mortgage to a fixed-rate
mortgage or to convert a longer term fixed-rate loan to
one with a shorter term. If you expect to remain in your home for
several years, you may want a fixed-rate mortgage that will ensure
that your interest rate will remain the same for as long as you
have your loan. If you decide that you like the stable, predictable
payments of a fixed-rate loan, then you must choose from a variety
of payment terms - 15 and 30 years are the most common. Although
the amount of your monthly payment may increase with a shorter term
loan, you will reduce the interest you owe on the loan, while building
up the equity faster.
Adjustable-Rate
Mortgages
Homeowners refinance with adjustable-rate
mortgages (ARMs) for many reasons. During times when interest
rates are higher, homeowners may trade in a higher fixed-rate
mortgage for a lower rate ARM. Because the index
values fluctuate, homeowners may also change from one type of ARM
to another or refinance with the same type of ARM to get a lower
rate. Arms feature an interest rate that moves up and down as market
conditions change. Although an ARM usually offers a lower initial
rate, your mortgage payments will change periodically (usually once
or twice a year). Interest rate changes typically are subject to
a limit or “cap” for each adjustment and for the life
of the loan. A typical ARM that adjusts annually may have a per-adjustment
cap of 2 percent and a lifetime cap of 5 percent. For example, if
your mortgage starts at 6 percent, it could increase to 8 percent
after one year. Over time, however, it would not be higher than
11 percent because of the 5 percent lifetime cap.
When considering refinancing with an ARM, it
is important to understand how often your mortgage will adjust and
how much your payment can change with each adjustment and over the
life of your loan.
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