Refinancing: What Are Your Options?

Once you have decided to refinance, you must now learn about the refinancing options available.  There are generally four types of refinancing plans – low fixed-rate loan, cash-out or cash-back refinancing, shorter term loan, and longer term loan.  The decision on which of these types best suits your needs depends on your reason for refinancing and your familiarity with the benefits and advantages that come with each type.

Low Fixed-Rate Loan

This option is best for people seeking to get a lower interest rate than what they are currently paying.  Procuring this type of refinancing option is best when market conditions lead to a sudden drop in mortgage rates.  Another reason to refinance to a low fixed-rate loan is when you currently hold an ARM or an adjustable rate mortgage, and you are worried about soaring interest rates in the near future.  If the index rates on which your adjustable rates are pegged continue to rise, your mortgage rates will rise along with it.  Note that adjustable rates are the sum of a specific index rate and a nominal rate charged by the lender, subject to a specific cap rate.  To prevent this from happening, you may want to grab the opportunity of securing a low fixed-rate now and enjoy it for the rest of your paying years instead of being made to pay higher and higher interest every year.

Cash-out or Cash-back Refinancing

A cash-back or cash-out refinancing option is the choice of people who are in need of additional cash on top of what they need to pay back their existing mortgage.  The extra cash can be used either for investment or for paying off other outstanding debts.

Shorter Term Loan

If your main goal is to immediately build equity and get rid of your debts sooner, a shorter term loan is the right refinancing option for you.  Keep in mind, though that shifting from a 25-year to a 15-year term will lead to higher monthly installments so make sure that your monthly income can cover this.  If you think it’s a little too much for you since your disposable income will be cut into half, just think about the fact that when you refinance to this kind of loan, you actually pay less interest in the long run and you can declare that you are debt-free much sooner.  There is also the benefit of a higher tax shield due to the higher monthly amortization.

Longer Term Loan

The opposite of a shorter term loan, a longer term loan gives the homeowner more time to pay for his mortgage and reduces the amount of amortization required every month.  This loan fits people who have suddenly lost their job or have need of more cash every month (say, new parents).  Their goal in refinancing is to have extra money today to provide for other needs regardless of the losses they incur (specifically the accrued interest payments in the long run).

Knowing your goal in refinancing is the key to identifying which type will best suit you.  It is important that you examine your existing mortgage first, compute your combined monthly household income and set a limit as to what amount is deemed acceptable and what is not.  Determine the long-term effect of refinancing instead of focusing only on immediate benefits – then and only then should you decide.

No related posts.