- 01
- Jan
If you are already in the process of refinancing your home mortgage loan, choosing the right type of mortgage for your situation could save you thousands of dollars. There are two types of mortgage loans to choose from when refinancing depending on your financial needs and tolerance for risk. Here are several tips to help you select the right type for mortgage when refinancing your home loan.
As stated, mortgage refinance loans come in two types: loans with fixed interest rates and loans with adjustable interest rates. Fixed rate mortgages have ten to fifty years of term lengths and will have payments based on an interest rate that will not change for the duration of the loan.
Adjustable rate mortgages, on the other hand, are specifically based on a financial index and that will include the mortgage lenders margin. Hybrid loans is another type of mortgage that are a combination of fixed rate and adjustable rate mortgages.
The adjustable rate mortgage’s interest rate will change every time the lender resets your loan. So when the lender resets not only your interest rate but also your payment amount, they will use the financial index your loan is tied to plus their own margin. The one-year treasury note is the most common index that is being used by mortgage lenders. Adjustable rate mortgages basically have the advantage of lower initial payments, though the loans have more risk for borrowers when the lender begins adjusting the loan.
For those homeowners who understand the risks with adjustable rate mortgage refinance loans, they will be able to save thousands of dollars with refinancing. So don’t write off adjustable rate mortgages just because someone told you that you will be in a payment shock when the lender starts adjusting your loan.
There are several advantages to accepting an adjustable mortgage, and as for starters, a low rate mortgage allows buyers to purchase pricier homes, while maintaining an affordable monthly payment. Moreover, because of record low rates, home buyers who obtain an adjustable rate mortgage can enjoy falling rates without having to refinance their mortgage. Thus, they avoid the closing costs and other fees.
Adjustable rate mortgages are ideal for individuals who plan on moving in a few years. Some people love the stability of living in one place for many years. In this case, refinancing for a fixed rate is a wise choice; however, if you prefer the flexibility of moving every three to five years, you will be sure to save money with an adjustable rate.
Luckily, home mortgage loans can be refinanced whenever you feel like it and some lenders even suggest allowing the loan to mature at least 12 months. But if you detect a market trend change, a smart move would be refinancing shortly after purchasing your home. Those contemplating refinancing have got to be prepared to pay additional closing fees. You can contact your current lender and inquire more of prepayment penalties regarding your mortgage refinance loans.
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