Financial Answer Center
- Introduction
- Getting into a Different Type of Loan
- Comparing Refinancing Loans
- When Does It Make Financial Sense to Refinance?
- Rate versus Point Comparison
- The Process of Refinancing
- What Can You Deduct on Your Tax Return?
There are several types of mortgage loans that will probably be available to you. After examining your financial situation, or if your financial situation changes, you may want to compare the different refinancing options to see if one of them puts you in a better financial position.
Adjustable Rate Mortgage (ARM) to Fixed-Rate
Refinancing to go from an ARM to a fixed-rate mortgage can be comforting. The peace of mind knowing that your mortgage payment won't fluctuate with changes in interest rates may allow you to sleep easier. A fixed-rate mortgage is best for those who plan on staying in their homes for a number of years. Of course, it may not make sense to do this if the cost of the fixed-rate loan is higher.
Adjustable to Another Adjustable
It may be very tempting to want to switch into another adjustable rate mortgage (ARM) when lenders offer very low introductory rates, called teaser rates. With a teaser rate, your interest rate and monthly payments in early years will be significantly lower than what you are paying now; but, if you plan on staying in your home for a number of years, the rates in later years will probably be the same or (quite possibly) higher than the rate you would have had on your original ARM. So be cautious when considering this.
Fixed-Rate to Adjustable
If you plan on selling your home within the time period that an ARM adjusts (one year, two years, etc.), it may be good for you to go from a fixed-rate mortgage to an ARM. For instance, say you are looking at a five-year ARM. The mortgage rate on that loan will not change until the end of the fifth year. If you are pretty sure that you will sell your home within the five years, you may save money by doing this.
30-Year to 15-Year Loan
There are advantages and disadvantages to moving from a 30-year loan to a 15-year loan. Let's take a look at some.
|
Advantages to 15-Year Loan |
Disadvantages to 15-Year Loan |
|
Interest rate is usually lower. |
Your monthly payment is higher—make sure you can afford it. |
|
Allows you to pay down your mortgage faster and build equity in your home. |
Depending on the economy and how long you plan to stay in your home, building equity may not be your best investment. |
|
Provides a forced discipline of putting more money each month toward paying down debt. |
Reduces financial flexibility... with the higher monthly payment, there is less money around each month. This could be a problem if a financial emergency comes up. |
Refinancing: 15-Year Mortgage versus 30-Year Mortgage
The example below compares the potential savings that will result by refinancing a 30-year mortgage to a 15-year mortgage with a lower interest rate or to another 30-year mortgage with a lower interest rate.
|
Current |
New 15-Year Mortgage |
New 30-Year Mortgage |
|
|
Term |
30-year |
15-year |
30-year |
|
Original Loan |
$95,500 |
||
|
Principal to Refinance (outstanding balance) |
$91,000 |
$91,000 |
$91,000 |
|
Interest Rate |
7% |
4% |
4.5% |
|
Points |
0 |
0 |
|
|
Monthly Payment |
$635.36 |
$673.12 |
$461.08 |
|
Years Remaining |
24 years |
15 years |
30 years |
|
Payments Remaining |
$182,985 |
$121,161 |
$165,990 |
|
Amount Saved Over Life of Loan |
$61,824 |
$16,995 |
What does this example show us? Going from a 30-year loan to a 15-year loan kept the monthly payment about the same and significantly reduced the total amount required to pay off the loan. This works great if your goal is to pay down debt faster.
Keeping the loan at a 30-year payment period significantly decreases the monthly payment from $635 to $461 and saves you money over the life of the loan. This works great if you are looking to reduce your expenses or you are looking to have more money to invest.
Of course, you must also consider how long you intend to remain in the house. If it will only be a short period of time, an analysis of the cost of refinancing compared to the projected savings will need to be addressed.
SUGGESTION: If you can't afford the payment on a new 15-year mortgage, consider a 20-year term. 20-year loans are offered by many lenders.
