You have several options when refinancing, just like you did when you first bought your home. Below is a brief overview of some of the factors and options to consider when refinancing your home. There is no one “right” option; because everyone’s situation and goals are different, the best option will be different for each person. Talk to one of our mortgage consultants to find out which option is best for your situation.
Many homeowners decide to refinance because the interest rate is lower now than when they first bought their home. Although they do have to pay closing costs and other fees for the refinance, they will save money over time because they will pay less in interest.
Change Loan Term
By switching to a loan with a longer term, homeowners can lower their monthly payments. Because they have longer to pay off the loan, they pay a smaller portion of the loan each month. However, longer loans accumulate more interest over time, so some homeowners opt for a shorter term when they refinance. Though their monthly payments will be higher, they will end up paying much less in interest over the life of the loan.
A fixed rate mortgage guarantees that the interest rate and monthly payment will stay the same for the whole life of the loan. This is a good choice if the current interest rate is low or is expected to rise in the future. With a fixed rate mortgage, even if the national interest rate rises, the homeowner continues paying the same low rate they agreed to at the beginning of the loan.
An adjustable rate mortgage offers a low interest rate and low monthly payments for an initial payment period. After the initial period, the interest rate will adjust to an indexed rate which could increase or decrease the monthly payments depending on the current market interest rate.
“No Cost” Refinance
All loans have closing costs and other fees associated with the loan process. In a “no cost” loan, these costs are paid by the loan broker or (more commonly) are rolled into the interest rate of the loan, which means that the homeowner has no or very few upfront costs. This can mean slightly higher interest rates, but depending on your situation, this may be an acceptable trade off for not having to pay the costs up front.
Cash Out Refinancing
Cash out refinancing gives a homeowner extra funds for home improvements, education, or other expenses. It involves refinancing for a loan amount that is higher than what they owe on the old loan. For example, if a homeowner owes $80,000 on their old loan but refinances with a $90,000 loan, they can use the extra $10,000 to fund current expenses. Ideally they also get a better interest rate on the new loan.
The Federal Housing Administration (FHA) and U.S. Department of Veteran’s Affairs (VA) offer refinancing loans to qualified homeowners.