Common Mortgage Types - Refinance Loan
Refinancing involves paying off your current mortgage by obtaining a new mortgage loan. Borrowers typically choose refinancing in order to take advantage of a lower interest rate being offered. While refinancing may end up saving money in the long run, it does involve many of the same steps and costs as obtaining a first mortgage. Here are some questions to ask yourself in order to determine if refinancing is right for you:
Is your current interest rate significantly higher than the prevailing market rate?
If the interest rate on your existing mortgage is at least two points higher than the current market rate, it's probably a safe bet to refinance your home at the lower rate. But keep in mind that it will most likely still take a few years to recoup the closing costs of your new loan.
Do you plan to stay in your current house for a few more years?
Because it typically takes around three years for the savings that come with a lower interest rate mortgage to balance out with the costs associated with obtaining a new loan, you should consider how long you plan to stay at your current residence when considering refinancing.
Are you unsatisfied with the rate and/or terms of your existing adjustable rate mortgage (ARM)?
If you currently have an adjustable rate mortgage but would prefer to have a fixed mortgage payment for the life of the loan, you should consider refinancing. You may also choose to refinance with another ARM that offers lower payment caps or a better interest rate.
Do you want to draw on the equity you've already built up in your house or build up equity more quickly?
If you are able to refinance your existing mortgage at a much better rate, you can use some of the equity you've built up in your home for a major purchase. You may also choose to refinance for a shorter loan term so that you build up equity more quickly.