Not that you have identified goals for your mortgage refinance, let’s figure out which kind of loan can achieve those goals. This section will discuss which loan features are best for lowering your payment, taking cash out, or shortening your loan term.
Lower Payment
Looking to get more flexibility in your monthly budget? Here are a few different ways to lower your mortgage payment.
Lower Your Interest Rate
To find the lowest rates that are available you may want to compare adjustable rate mortgage (ARM) with fixed-rate mortgage. ARM rates are often lower because of the risk associated with your rate increasing after the initial fixed-rate period is over. If you are planning to sell or refinance within the next 5 to 10 years, an ARM could be a good option for you.
One thing to consider is that simply lowering your interest rate may not guarantee a lower payment. There are other factors such as term, taxes, and insurance that can influence your monthly payment. A good rule of thumb is if all of the other factors remain the same, lowering your interest rate will in fact lower your monthly payment.
Change Your Mortgage Term
If you are more concerned over having a lower payment than paying off your loan quickly, then changing your term could be right for you. Lengthening your mortgage term allows you to stretch your payments out, which will make your payment smaller. For example if you have been paying on your mortgage for 5 years, refinancing with a 30-year mortgage will stretch your current principle an extra 5 years and make the payment smaller.
Take Cash Out
There are a lot of loan products to choose from that will allow you to get cash out from the equity in your home. It is important to choose the right one that fits your situation and goals.
If you are simply trying to take as much cash out as possible, a 30-year loan is probably your best bet. Since you are going to add to the principle on the loan, choosing the longer term will allow you to stretch your payments and give you the lowest monthly payment.
If you are taking cash out, but are focused on becoming debt free, a shorter term would often be ideal. You can use the cash out to pay off credit cards or other debt while paying off your home and save yourself on interest charges.
Choosing between Conventional and FHA depends a lot on your personal situation. FHA is designed to allow those with some flaws on their credit report the opportunity to purchase or refinance. Most people that qualify for Conventional financing do not consider FHA due to the fact that Mortgage Insurance (MI) is required on the life of the loan for FHA, whereas a Conventional loan product will eliminate MI at 80% LTV. There is even a product available to some that will eliminate MI at 89% LTV on Conventional loans. Your loan originator will be able to discuss the different options and guide you in making a decision that makes the most sense for your situation.
Shorten Your Term
Shortening your term is a solid way to pay off your home more quickly. An added bonus is that shorter term often carries less interest than a longer term loan. With the lower interest, you will observe dramatic savings on the total cost of ownership of your home.
Another option we offer to qualified borrowers, is to create a custom term. What this looks like is say for example you have been in your current mortgage for 5 years. If the interest rates are lower now, and you want to take advantage of the lower term without starting over on the 30 year amortization, you can refinance for the lower rate at 25 years. You would effectively be picking up where you left off, with lower interest.
Regardless of whether you are using Conventional, FHA, or VA, there are options for lowering your term. Again, choosing the right product depends on what is right for you in your current situation and to meet your goals.