Are you thinking of refinancing your home mortgage? Depending upon your current interest rate on your mortgage, and the rates in the market, this can make a great deal of sense. If you can get a mortgage interest rate that is ½ point to a full point lower than you have right now, you may be able to save considerably on your monthly payment. Finding a home refinance loan that meets your financial goals and qualifications is essential.
More importantly, you may be able to save tens of thousands of dollars of interest on your loan over the next decade or more as you are paying off the loan. As you are looking to refinance your mortgage, you will have a number of choices to consider. Which you get will depend upon your exact needs and circumstances. Let’s take a look at the most common, basic types of home mortgage refinance loans:
#1 – 15 Year Refinance Loans
A 15 year refinance loan is a very popular option for people who have paid off a good chunk of their mortgage and want to refinance at a lower rate. These people do not want to start over with a 30 year mortgage; they want to get their loan paid off faster. The advantage of a 15 year mortgage is that the interest rate will be lower than a 30 year loan. This may be a good option for you if you are able to refinance for 1 point or so lower than your current rate. If you have a 30 year mortgage currently, you might be able to refinance into a 15 year mortgage without a huge bump in the payment.
#2 – 30 Year Home Refinancing
A home refinance loan for 30 years is the most common choice for people who want to refinance at a lower rate but do not want to get a higher payment as often is the case with a 15 year mortgage. Your payment will be lower each month, but you also have to keep in mind that you will pay a higher interest rate than a 15 year loan. And, you will pay much more in interest costs over 30 years than you will over 15 years.
#3 – Cash Out Refinance Loans
Another very common option for people refinancing their mortgage is to refinance at a lower interest rate and to also pull equity out of the home to use for whatever purpose that the homeowner wants. House refinancing remains one of the most popular methods for people to get access to money cost-effectively. The cash-back refinance has helped many homeowners achieve their financial goals cost-effectively. This is one of the big advantages of owning a home in the first place: You can use the equity that builds up in the home to pay for other things, such as:
- Buying investment properties
- Paying for a college education
- Paying off debt
- Renovating your home
Here’s how this works: When you buy your home, you had to put down a certain amount of down payment, such as 5% or 10%. That cash represents your equity in the property. As you pay your loans each month, you are slowly paying off principal, thereby increasing your equity in the home. Also, in most cases, the value of the home will increase over time, generally speaking. This will increase your equity even more. So, after five or ten years, you may have 20% or more equity in the home, which you can pull out with a cash out refinance and use as you see fit.
When you are able to qualify for home refinancing at a lower interest rate, you can lower the impact that having more debt will have on your monthly payment. Your payment will certainly go up if you take out, say, $50,000 in equity, but it will be less with a lower interest rate than it would have been at your current, higher interest rate. If you do not have any equity in your home, you will not be able to use a cash out refinance loan.
#4 – Cash In Refinance
Home owners will choose this type of refinance for several reasons. Some owners want to refinance when they owe more than the home is worth to reduce their interest rate. Others want to get a home refinance loan and bring cash to the deal so they can get rid of private mortgage insurance. Last, some home owners want to refinance and avoid higher interest rates and payments of a jumbo mortgage.
#5 – Government Refinance Loans
There are some federal refinance programs that allow homeowners to refinance their home when they owe more on the home than it is worth. One of the major ones is the Home Affordable Refinance Program or HARP. It allow you to refinance up to 125% of the value of the home. This can be a life saver for people who are underwater on their mortgage and do not want to give up the home to foreclosure.
The Federal Housing Administration also has a fantastic FHA streamline refinance program for people who have an FHA mortgage at a higher interest rate. Most people who do the FHA streamline program can refinance their loan without a new appraisal, without a credit check, and without verifying their current income. For people who are having trouble paying their FHA mortgage, the streamline program can save them from foreclosure. You do need to be current on your loan to qualify for the FHA streamline program. Check the FHA Resource page for current requirements on government insured loans.
Refinancing your mortgage is a very popular choice for millions of Americans when home refinance rates are as low as they are right now. If you have an interest rate on a loan that is a decade old or more, you may be able to refinance into a mortgage that saves you $100 a month on your payment or more. You do need to take a look at the closing costs that you will be charged when you refinance. If you plan to sell your home in another year or two, you may want to hold off on refinancing. Closing costs can be 2% or 3% of the amount you are refinancing, and you may end up not enjoying enough of a benefit for it to be worth the cost. But run the numbers and if a refinance works for you, choose one of the above options and you will be better off.