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The type of mortgage loan you select will depend on
how long you expect to continue living in your current
home, your reasons for refinancing, and the amount of the
monthly payment you can comfortably afford.
Fixed-Rate
Mortgages
When interest rates decline, some homeowners choose to refinance
from an adjustable-rate
mortgage to a fixed-rate
mortgage or to convert a longer term fixed-rate loan to one with
a shorter term. A fixed-rate mortgage ensures that your interest
rate (and your payments) will stay the same over the life of your
loan - which may be an important consideration if you plan to stay
in your home for several years. When you choose the length of your
repayment (usually 15, 20 or 30 years), keep in mind that while shorter-term
loans may have higher monthly payments, they also let you pay less
interest and build equity faster.
Adjustable-Rate
Mortgages
Homeowners refinance with
adjustable-rate mortgages (ARMs) for many reasons. On an ARM,
your interest rate - and therefore your payments - can move up or
down, depending on market conditions. During times when interest rates
are higher, homeowners may trade in a higher fixed-rate
mortgage for a lower rate ARM. Because the index
values fluctuate, homeowners may also change from one type of ARM
to another or refinance with the same type of ARM to get a lower rate.
The rates on an ARM usually change once or twice a year, and there
is typically a "lifetime
rate cap" (or limit) on both the amount of each individual rate
adjustment and the total amount the rate can charge over the whole
term of the loan. For example, if your loan starts at 5 percent, has
a 2 percent per-adjustment cap, and a lifetime adjustment cap of 4
percent, you know that your loan might go up to 7 percent the first
time the rate changes. You also know that the rate can never go over
9 percent over the life of the loan (5 percent to start plus a 4 percent
lifetime cap).
When considering refinancing with an ARM, it is important to understand
how often your mortgage will adjust and how much your payment can
change with each adjustment and over the life of your loan in total.
Other Types of
Mortgages
If you are planning to move within the next few years, you might
want to consider a balloon
mortgage. These short-term loans (usually five, seven, or ten
years) offer lower interest rates, but only a piece of what you borrow
is paid off during the term of the loan. At the end of the term, you
pay off the remaining balance in a lump sum or refinance it. You might also consider a biweekly mortgage, which
requires loan payments every two weeks but pays off more quickly.
A biweekly mortgage saves you thousands of dollars in interest and
builds up the equity in your home
faster.
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