Home refinance options: Choose the one that works for you
Your guide to choosing the right home loan
Lenders offer a wide range of loan programs to meet the financial needs of almost any homeowner. Here is a brief overview of the features and advantages of each type of home loan; your mortgage banker will explain all of the options available and help you get the loan that works.
With a fixed-rate mortgage, the interest rate remains the same throughout the life of the loan and, in general, your monthly principal and interest payments will never change. As a trade-off for the security of knowing that your monthly payment won’t increase, fixed-rate mortgages typically have a slightly higher initial interest rate than adjustable-rate mortgages.
You may prefer a fixed-rate mortgage if:
- You like the stability of having the same mortgage payment every month.
- You plan to stay in the same home for at least 5 to 7 years
- You don’t want to take the chance that interest rates could rise in the future.
- You can afford a slightly higher monthly payment in the first few years of the loan (compared to the payment on an adjustable-rate mortgage).
When picking the term that best suits your needs, keep in mind that a fixed-rate loan with a shorter term will generally have a lower interest rate, allow you to build equity faster and result in a lower total amount of interest paid over the life of the loan. On the other hand, fixed-rate loans with longer terms have lower monthly payments.
Adjustable-rate Mortgages (ARMs)
ARMs are offered with initial fixed-rate terms of 3, 5 and 7 years, expressed as 3/1, 5/1 and 7/1 ARMs. This means that the interest rate of the loan will be fixed for the first 3, 5 or 7 years of your mortgage, and then the rate will be adjusted annually for the remaining life of the loan.
Government Loan Programs
There is a loan program offered by a government agency (Federal Housing Authority [FHA]) that is designed to make it easier for certain home buyers to obtain a mortgage.
The features of government loans include:
- Lower down payment requirements than a non-government loan program
- Maximum loan amounts based on the county where you are purchasing a home
- An insurance premium paid by the borrower at closing
- A selection of fixed-rate loans (15-, 20-, or 30-year loans) or adjustable-rate loans (3/1, 5/1)
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