Refinancing Your Mortgage: What's Your Objective?

By Gina Pogol
Mortgage Credit Problems Columnist

Different home loan products are designed to help borrowers solve specific problems. Whether it's paying less interest, lowering your payment, freeing up cash for investment, or debt consolidation, there is a mortgage that's best for you. Here's what to look for.

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Refinance Objective: Lower Interest Rate

If you got your current mortgage a couple of years ago, chances are you can save money by refinancing. And while 30-year fixed rates are very low, you might be able to do even better.

Are your plans for your property short-term? If you don't expect to own your home more than a few years, a hybrid ARM could save you a lot. Rates on 5/1 ARMs, which are fixed for the first five years and then convert to ARMs, are a full point lower than 30-year fixed rate mortgages. That's a savings of $238 a month on a $400,000 loan, and $14,258 over five years.

Could you make a higher payment? Rates on 15-year fixed mortgages can be up to .5% less than those of 30-year loans--a bargain if you can swing the higher payment.

Refinance Objective: Lower Payment

There are several ways to achieve a lower payment with a mortgage refinance. Lowering your interest rate and stretching out the repayment of the balance over a longer period of time can both result in lower monthly payments. If you have been paying on your mortgage for about five years, simply refinancing it to a new 30-year loan can get you a lower payment, although you may pay more interest over the life of the loan.

For maximum payment reduction, choose a hybrid ARM with the lowest possible rate, and add a 40-year term. Lowering a $400,000 mortgage at 6% to a 40-year 5/1 hybrid ARM at 4% can drop the payment by $726 a month.

Refinance Objective: Free Up Cash

If you want extra cash for investment, to pay off debt, or fund a major expense, there are several ways to go about getting it. The first is to simply refinance to lower your payment, and invest the difference each month or pay down your debt. If you have extra home equity, you can opt for a cash-out refinance or a home equity loan. Which is better?

That depends on your current mortgage and your plans for your home. Even if you could get a lower interest rate by taking a cash-out refinance, the costs of doing so might make it a bad idea if you don't plan to keep the home for many years. A refinance calculator can help you decide. Home equity loans cost little or nothing to originate--this can go a long way toward offsetting the higher interest rate that accompanies these loans.

Finally, those who are 62 or older can get a major cash infusion with a reverse mortgage or retire their current loan and have no mortgage payments at all--check with a lender for details.

There are hundreds of mortgage products available to meet a wide variety of needs. Complete the online form and let lenders present their best offers to you.



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