What Is the Best Choice?
When making the decision to refinance, you want to make sure to choose wisely. You want to avoid ending up locked into a mortgage scenario that will hinder your financial goals. The key is to consider all your options and choose the mortgage program that will best meet your needs.
With a fixed rate mortgage, your monthly mortgage payments stay the same since they are set with an interest rate that does not change for the life of the loan. This plan will provide you with established and predictable monthly mortgage payments. Likewise, the fixed rate also will protect you against your payments rising with rising rates.
The rate of on an adjustable rate mortgage is designed to change with the movements of the market index to which it is linked. Interest rates are initially lower for a set period (ranging from 1 to 10 years) than those of fixed rates loans.
However, after the initial set interest rate period, interest rates may rise — causing your monthly payments to increase as well. At that point, the amount of your payments is determined by the direction, up or down, of the market index. ‘Rate caps’ are established to put a limit on how high or low your rates can go.
While rate-term refinances can change the repayment terms or decrease the interest rate or both, a cash out refinance provides a higher loan amount than the current mortgage. This excess then can be used to consolidate debt, put towards home improvements, dedicate to educational funds or other investments.
With the many different loan programs that exist, repayment schedules can vary greatly. Fifteen to thirty years are the most commonly found repayment schedules with the 15 year mortgages typically offering lower interest rates than those found with 30 year mortgages. Likewise, you would pay substantially less in total interest if you were to stay with the 15 year mortgage through the life of the loan.
A shorter term often is the best choice if you plan to own the home for the full life of the loan. Although this can set you up with higher monthly payments, it will decrease your interest rate and reduce the amount of interest you pay over all.
On the flipside, if you have plans to own the home for less than seven years, you may be best served by going with a longer term of repayment. While this could set you up with a slightly higher interest rate, it could provide you with lower monthly payments since they are spread over a longer period of time.