Types of Mortgage Refinancing Loans

There are three basic options that a homeowner can choose from if they decide on mortgage refinancing. Each should be carefully considered and researched, if needed, before a decision is made.

Fixed Rate Mortgage

With a fixed rate mortgage, your interest rate remains constant. If you have good credit, you may be able to get a much lower interest rate. This type of mortgage refinancing creates stability. Your payments do not vary during the term of the loan.

When you refinance with a fixed rate mortgage loan, you do not have the option of taking advantage of dropping interest rates unless you refinance again. Each time you do this, you have to pay closing costs.

Adjustable Rate Mortgage (ARM)

If you have an adjustable rate mortgage, you can take advantage of dropping interest rates at any time. The disadvantage is that interest rates can also rise and you will be paying more money each month. Most lenders add a clause to the contract which prevents the interest rate from being raised or lowered by a certain percentage over a specified period of time.

Hybrid Mortgage Refinancing Loans

A hybrid mortgage refinancing loan is one that starts with a fixed rate and after a certain period is converted to an ARM. Lenders will offer a fixed interest rate for an introductory period and then convert the mortgage loan to an ARM. It can also work in reverse. The lender will have an introductory interest rate for an ARM and after a certain period of time convert the mortgage loan to a fixed rate. Choosing this option can be risky. The interest rate at the end of the introductory period may not be favorable to you.

Before choosing a type of mortgage refinancing loan, you should research the pros and cons of each. Determine the best one based on your financial situation.