Even if you don't need money to consolidate your debts or to make improvements to your home, you can benefit from considering refinance options open to you. Since real estate values are rapidly rising and interest rates are down, there are many advantages to refinancing your home. The extra cash you realize from taking out a home equity loan, for example, could increase the value of your home significantly or it could make your retirement years much easier.
When you look at the refinance options, take a look at whether you have an ARM mortgage or an FRM mortgage. With an ARM (adjustable rate mortgage), the rate of interest may change during the term of your mortgage after the agreed fixed rate period ends. In an FRM (fixed rate mortgage), the interest rate stays the same for the term of your mortgage.
There are pros and cons with each of these options when it comes time to refinance. With an ARM, you will have a lower monthly payment because the initial rate for refinancing is lower. If the interest rate drops, your monthly payment will also drop. On the other hand, if the interest rates rises, so will your payments and a significant rise in the rates could make it very difficult for you to make your monthly mortgage payments.
With an FRM, it is easier to budget because the monthly payment remains fixed for the term you choose for your mortgage. The interest rate at the time you signed the final papers is the one that will remain in place no matter how the market conditions change interest rates. A disadvantage to this is that if the interest rate goes down significantly, you may be paying away a lot of money needlessly in high interest rates. If this is the case, you should seriously consider refinance as a way to lower your monthly payments and save you money over the term of your mortgage.
There is also another option you can consider if you want to refinance your mortgage because of the interest rates. Instead of choosing to lock your mortgage in for the full term of 25 or 30 years, you can do so in smaller increments. Choosing to lock in your mortgage for five years, for example, lets you choose an ARM or an FRM for that period of time. At the end of the term you can refinance again at a different interest rate. When you choose this feature, you also have the option of paying off a significant portion of your mortgage at the time your refinance. Since most lenders charge a fee for paying off a mortgage early, you can save up money each month and make a substantial payment on the balance at the time of refinancing.
When you apply to refinance your mortgage, you need to ask when the interest rates are adjusted. If it is yearly, then you can choose an ARM. However, if the change occurs on a monthly basis, then you are better off with an FRM.
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