Mortgage Refinancing: Evaluating Loan Types
Karen LawsonLoanBiz Columnist
Homeowners who want
to refinance their mortgage loans have a wide variety of options. Mortgage
lenders provide free online mortgage calculator tools to help compare and
contrast features and benefits of mortgage loans. Using these calculators can
help identify which mortgage loans meet specific circumstances. Here are a few
examples of how refinancing can help in a variety of circumstances.
Adjustable rate mortgage
(ARM) to fixed rate mortgage FRM
The most popular option for refinancing is to refinance an
ARM to an FRM to stabilize principle and interest (P&I) payments and/or
eliminate non-standard features such as negative amortization. This type of
refinancing does not impact changes in property taxes, hazard insurance, or mortgage
insurance payments, so this portion of a mortgage payment can continue to
change each year.
Negative amortization
to standard amortization
Option ARM loans allow borrowers to make very low payments that
don't cover the actual interest owned. The unpaid interest is then added to the
mortgage balance. This is called negative amortization, and eventually payments
can increase sharply in order to repay the loan. A mortgage with negative
amortization can be useful in helping homebuyers who need a very low initial
payment. Once the homeowners can afford a higher payment they may want to refinance
to a fully amortizing mortgage for stability.
Understanding prepayment penalties is important when
shopping for a mortgage loan. A prepayment penalty is assessed if a mortgage is
paid off or refinanced within a certain time period. Usually the lender offers
borrowers more favorable rates if they accept a prepayment penalty. Reading and understanding mortgage disclosure
statements before accepting a mortgage loan can help avoid problems later.
Debt Consolidation /
Cash-out refinancing
Credit card balances and other consumer debts can quickly
add up. Card companies may charge high interest rates, late fees and other
charges that can make paying off consumer accounts very difficult. It may be
possible to pay off high cost debts with cash-out refinancing. This option
means replacing an existing mortgage with a bigger loan, and the difference
(cash out) is used to pay off other debts. Mortgage calculator tools can help
estimate P & I payment amounts, and affordability based on monthly income
and expenses.
How to Shop
Federal disclosure laws require lenders to provide home
mortgage disclosure statements that show all terms such as payment due dates,
interest rates, interest rate change dates, and the total cost of financing.
Ask lenders to provide estimates of closing costs associated with refinancing.
It's a good idea to have a list of questions and to take notes when speaking
with mortgage lenders. As with any major
financial transaction, it's a good idea to consult a financial advisor or tax
professional to assist in identifying appropriate refinancing options.
About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno
