Know Your Refinancing Options

If you have a home and a mortgage, and you are thinking about refinancing, first you must know both what you want out of your new mortgage and what your different options are, so that you can pick the refinancing plan that best fits your needs.

There are many different situations that will make people consider refinancing their mortgage. Some of the most common ones are:

• They have a fixed-rate mortgage with a high interest rate, and they are looking to get a lower interest rate.

• They have an adjustable rate mortgage (ARM) and are looking to get a fixed rate.

• They have two mortgages and would like to consolidate them into one.

• They have a long-term loan and would like a shorter-term loan so they can pay it off and build equity more quickly.

• They have a short-term loan and would like a longer-term loan so as to reduce their monthly payments.

• They want to move from an interest-only mortgage to a loan that pays down the principal.

• They want some extra cash to make a purchase or to pay off other debt.

There are four main mortgage refinancing options available that can meet the needs listed above:

1. Cash-out or Cash back Refinancing. This plan allows you to refinance your mortgage for more than you currently owe, and the difference - the equity - is converted into cash for the homeowner.

2. Low Fixed-rate Loan. If you currently have a high fixed-rate mortgage and the rates have dropped due to market conditions, then you may want to refinance to a low fixed-rate loan. Also, if you have an ARM, you might consider this option in order to get the security of a fixed rate. Even if your adjustable rate is low now, it is not guaranteed to remain that way; but if you get a low fixed-rate loan, then you lock that low rate in for the life of the loan. This option is a good choice if you are not planning on moving within the next five years.

3. Shorter-term Loan. If your main goal is to quickly build up equity and to pay off your mortgage sooner, then the shorter-term loan is probably your best choice. A lot of times, if you refinance to this type of loan, your monthly payments will be higher, but you will pay substantially less interest and your mortgage will be paid off sooner. Also, you would benefit from a larger tax deduction on interest if you move from a 30-year fixed to a 15-year fixed loan. There are some cases, however, in which you may be able to refinance to a shorter-term loan without raising your monthly payment - if you’ve had your current mortgage for enough years.

4. Longer-term Loan. If your current monthly payments are higher than is comfortable for your financial situation, then you might want to consider refinancing to a longer-term loan. This will result in a decrease in your monthly payments, since you will have more time to repay the loan.

Examining your current mortgage and knowing how you would like to improve it are the first steps you need to take when starting the refinancing process. Once you know this, you can choose the option that will best help you achieve your goals.

Source: Informa Research Services