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Types of mortgages to refinance into that can help.

Refinancing is when a homeowner applies for another mortgage in order to pay off a current home loan that is at a higher interest rate. In some cases the trigger for a refinance may be to shorten the length of the loan, so maybe change it from a 30 year to a five year. If the original loan had a higher interest rate, then you get help with paying your mortgage by refinancing into a newer home loan with a lower interest rate.

30-year fixed rate mortgage

This traditional mortgage still remains a favorite of borrowers. The popularity of it has even increased as the recent housing crisis and the mortgage issues that many consumers faced have helped reinforce the importance of a fixed rate mortgage.

Although the interest rate you need to pay on this type of loan is generally higher than the starting rates on other mortgage types, the amount you are responsible for paying and your interest rate will remain fixed for a full 30 years. It can never change, no matter what happens to the economy or borrowing costs. That's a help to planning your long-term finances. Also, if you refinance at the right time, when rates are low, it can help people save money.

A variation on this type of mortgage is the fixed-rate loan that has a term of 15 or 20 years. The required monthly payments on these length mortgages will be higher than on a 30-year fixed loan, but you will build home equity faster and, in the long term, will be paying much less in interest. So over the years that type of product can help you save on the total mortgage debt repaid.

Most lenders will also allow you to prepay the principal on a 30-year loan, which can help you retire the mortgage debt earlier. Some lenders will also offer 40-year term mortgages, which will lower the monthly mortgage bill, but the length of these stretches out your indebtedness significantly. It will also increase the total amount you will have been paying on interest over the term of the loan. So it can help lower your monthly mortgage payments, but in the long term, you are responsible for paying more in total payments due to interest on your 40 year home loan.

One-year adjustable-rate mortgage, or ARM, mortgage

This is the original version of the adjustable rate mortgage, and it is commonly referred to as an ARM. There are some variations of this too, mostly around the length of them.





A one-year ARM has a 30-year length, but your interest rate, and the amount you need to pay, will adjust every year. The interest rate will be determined by the financial index that your mortgage loan is pegged to, which is typically a one-year Treasury rates or the LIBOR index (which is an acronym for the London Interbank Offered Rate) or the COFI index (which is the Federal Reserve Cost of Funds Index). The COFI and LIBOR indexes are also frequently used for other mortgages that adjust their interest rates more often than once a year.

There can be different lengths of these ARM products as well, such as 3 or 5 year. This basically means that your payment can change at those designated time frames.

FHA mortgage

These type of home loans are insured by the federal government through different programs that they have, such as mortgage insurance. The federal government is allowing people to refinance into these types of loans. While a refi is allowed, it is usually the case that first-time home buyers are ideal candidates for an FHA loan. The reason being because the down payment requirements are minimal, credit ratings are not as important, and FICO scores do not matter when the mortgage is approved. So this type of home loan financing may be the best option for borrowers with less than stellar credit scores.





By Jon McNamara

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