Mortgage Refinance Loan Options

Here are the mortgage refinancing options available to you.

If your financial situation changes and you need to get some mortgage payment relief, or if market interest rates fall, you may find benefit in refinancing your mortgage loan. The good news is that you have multiple mortgage refinance loan options available to you.

The first choice is whether to go with a fixed-rate loan or an adjustable rate mortgage (ARM), and for what duration. A fixed-rate loan is very safe, since you know exactly how much you’ll be paying for the life of the mortgage (well, you might end up paying less if you are lucky; since when rates go down, nobody can stop you from refinancing again at better rates!). With ARM, the future is less predictable. Typically, ARM loans have a few years of a fixed rate, and then they revert to a variable rate. The variable rate will change with the market conditions. In the worst case, you may end up paying very high interest rates (for example, if serious inflation hits several years down the road).

The other choice you have to make is whether to take cash out or not. If you decide to go with cash-out refinancing, you would normally pay much higher interest rates. However, many people still choose this option for many reasons. First, you may want to consolidate of existing high-interest debt (usually mortgage rate is by far the lowest rate you can get on your debt). Or you may invest in improvements in your house that will increase its value. Finally, you can simply use the cash to enhance your lifestyle; nothing wrong with taking $10,000 out of your home equity and use it for a luxurious month-long family vacation traveling around Europe.

Last but not least, you may refinance the mortgage to reduce immediate payments by switching from a regular fixed-rate loan to an interest-only loan. This is good for tax planning since interest on mortgage loans is tax deductible. Unfortunately, it usually involves high interest rates and higher payments in the future, so you should only use this option if you really have no other choice.