The Right Time to Refinance

How low should mortgage rates be before you consider refinancing? Experts say to consider it if the available refinance rates are two to three percent less than the one on your current home loan. Also, refinance mortgage payments only if you plan to be in your current home for a while (at least two more years) to make sure that you offset closing costs and fees.

Types of Loans

Fixed Rate Loans

The reason to choose a fixed rate mortgage is simple: the beautifully boring predictability of it all! When you refinance your home using a fixed rate mortgage, you know exactly what your payments will be for the life of the loan. You also don't have to worry about the volatility of interest rates.

The most common fixed rate mortgage loans come in 15, 30, and 40-year terms. Here are the basic pros and cons of each type of fixed rate mortgage loan:

15-year mortgage -- Pros: You'll find the best interest rates with a 15-year mortgage and build equity in your home faster. Cons: Of course, there are higher monthly payments, and you will likely need a larger down payment.

30-year mortgage – This is the most common type of fixed rate mortgage. Pros: Monthly payments will be lower than a 15-year mortgage. Cons: You won't find the same great rates associated with a 15-year term and it will take you longer to build valuable equity in your home.

40-year mortgage – Pros: lower monthly payments. Cons: higher interest paid over the life of the loan. This is the choice of many who can't afford a large down payment.

Adjustable Rate Mortgages – An Adjustable Rate Mortgage (ARM) is a mortgage for which the interest rate is not fixed, but changes during the life of the loan in line with movements in an index rate. You may also see ARMs referred to as AMLs (adjustable-mortgage loans) or VRMs (variable-rate mortgages).

With a fixed-rate mortgage, the interest rate stays the same during the life of the loan. But with an ARM, the interest rate changes periodically, usually in relation to an index, and payments may go up or down accordingly.

Lenders generally charge lower initial interest rates for ARMs than for fixed-rate mortgages. This makes the ARM easier on your pocketbook at first than a fixed-rate mortgage for the same amount. It also means that you might qualify for a larger loan because lenders sometimes make the decision about whether to extend a loan on the basis of your current income and the first year's payments. Moreover, your ARM could be less expensive over a long period than a fixed-rate mortgage--for example, if interest rates remain steady or move lower.

Against these advantages, you have to weigh the risk that an increase in interest rates would lead to higher monthly payments in the future. It's a trade-off--you get a lower rate with an ARM in exchange for assuming more risk.

To learn more about your specific scenario, we can analyze your situation in more detail by contacting one of our loan officers.