How can you benefit from a refinance mortgage? There are a few different reasons to refinance, including several ways to save money, but one of the main things to consider is how long you may keep your home, because the amount of savings from refinancing a home loan can vary depending on the mortgage program and loan costs.
A good way to save money if you plan to stay in your home for a short time, is to use a zero point refinance loan, or a zero cost refinance, because if you move or refinance your mortgage later, you won’t waste money having to pay loan fees again.
Another potential money-saving refinancing option is a 3 year ARM or a 5 year ARM refinance, which provides a lower fixed rate for the first 3 years or 5 years of the home loan.
For refinancing with a higher debt ratio, or if you have lower credit scores, see FHA loans.
Short term refinance mortgage loans include a 6 month, or 1 year ARM. To attract borrowers, lenders provide adjustable loan rates that start lower than fixed refinance rates. Every 6 months or 1 year, the rate is adjusted based on the index plus the margin, subject to periodic and lifetime rate caps. The index can be based on the 1 year T-Bill, Cost of Funds, Treasury Average, or LIBOR. The margin is a fixed number set by the lender, which can range from 2.25 to 3.00.
If you want a cash out refinance mortgage, but you currently have a low interest rate, you may want to consider using a home equity loan or a second mortgage. If you are looking for lower payments, a 30 year fixed rate refinance is a good choice. If your goal is to keep your house until it is free and clear, you may want to consider a 15 year fixed refinance.
When you compare a 15 year term, the monthly payments will be higher, but the principal reduction is accelerated, so you can drastically reduce the amount of interest paid for a mortgage.
For example, the monthly payment for a $200,000 loan, for a 15 year term would be almost $500 per month more than a 30 year term, but it would also save about $128,000 in interest payments. Technically, you could achieve similar results on a 30 year refinance mortgage by sending an additional amount each month to be applied to the principal balance, if you have the discipline.