Explore Different Refinance Options

Explore Different Refinance Options

Once you’ve figured out exactly what you want to accomplish with your refinance, now you’ll want to determine which type of loan will best achieve your goals. Different loan features will be best for lowering your payment, taking cash out, or shortening the term of your mortgage.

Lower Your Monthly Payment

If your primary goal is to have more breathing room in your monthly budget, these are some options for lowering your monthly payment with a refinance.

Reduce Your Interest Rate

If you are trying to get the lowest interest rate possible, you may want to look at an adjustable rate mortgage (ARM). The initial fixed-rate period of an ARM will generally have a lower rate than a standard fixed-rate loan. This is balanced by the risk that after this initial period, your rate may increase. But if you plan to sell your home or refinance again in the next five to ten years, an ARM may be a good option for you.

Be aware that refinancing with a lower interest rate doesn’t necessarily mean your monthly payments will be lower. Having a lower interest rate will mean that the interest portion of your monthly payment will be a smaller piece of the total payment – but factors such as insurance, taxes, and the term of the loan all impact how much your monthly payment will be. For example, refinancing to a shorter term loan will often get you a lower interest rate, but the shorter term usually means higher monthly payments.

Change the Term of Your Mortgage

If your first priority is reducing your monthly payment, and you are less concerned about paying off your loan quickly, then changing the term of your mortgage may be the right choice. Refinancing to a longer term spreads your repayment over more years, making each payment smaller. For example if you have a 15 year term, refinancing to a 30 year term can significantly reduce your monthly payments. However, keep in mind that a longer term will mean you pay more in interest over the life of the loan.

Take Cash Out

There are quite a few loan options to choose from if your goal is to take cash out of your equity. Choosing the right one depends on your goals and specific situation.

If your goal is to take out as much cash as possible, going with a 30 year loan is likely the best option. Because you are increasing your loan amount by pulling cash out, you’ll probably get the lowest monthly payment with a 30 year term.

If you are hoping to use cash to pay off other debts, but still want stay on track to become debt free as soon as possible, a shorter term might be a better option. You can use the cash from the refinance to pay of credit cards or other debt, while still paying off your home quickly and saving on interest.

Going with a conventional loan or FHA loan for your refinance depends on the specifics of your situation. Many homeowners will find that an FHA loan is less expensive compared to a conventional loan. But if your current mortgage is conventional, it may be the case that refinancing to another conventional loan makes more sense. Talk with your lender to figure out which loan option is the most affordable choice for taking cash out in your situation.

Shorten Your Mortgage Term

Reducing the term of your mortgage is a smart way to pay your home off more quickly and save money in the long run. Shorter term mortgages generally have lower interest rates, and because you pay it back over fewer years, you pay much less interest over the life of the loan.

There are a number of loan options that can shorten the term of your loan, and deciding on the right one will depend on the specifics of your situation. If you have excellent credit a conventional loan can be a great choice. If you are a active duty military or a veteran, a VA loan will almost always be your best bet. Talk with your lender to figure out which option is most affordable for shortening the term of your loan.

Refinancing Options if You’ve Been Denied Before

Have you been denied on previous attempts to refinance?

Certain recent changes in the mortgage industry have made it easier for homeowners to qualify for refinancing. Homeowners who were denied for FHA, VA, or conventional loans in the past may have a better chance of being approved, thanks to less restrictive guidelines.

If you’ve been unable to qualify for a refinance because you have little or no equity, the federal government’s Home Affordable Refinance Program (HARP) is one option that might help you out.