With rates at or near record lows, refinancing your mortgage could be a smart financial move. Educating yourself on the different loan programs available and considering your short-term and long-term goals will help you make the most informed decision. Ultimately, you need to consider how much longer you want to live in your home and how much you will actually end up saving if you refinance. After factoring in closing costs and fees, changing your loan program may be one of the best financial decisions you'll ever make.
Consider these mortgage plans when choosing the best option for you.
Mortgage plan: 15-year fixed rate
Ideal for: Anyone who plans to retire within 20 years and can afford higher payments on a shorter-term loan. This is also a good match for those who might have a low risk tolerance because this plan makes the homeowner immune to market and interest rate fluctuations. If you think interest rates might drop in the near future, you may be better off with an ARM loan.
Mortgage plan: 1- to 7-year adjustable rate mortgage (ARM)
Ideal for: Reducing the monthly loan payment so the mortgage becomes a little more affordable. ARM loans can also be a good option if you think interest rates will stay about the same for the next one to seven years -- if they fluctuate a lot, you could end up paying more than anticipated. These are also a good match for homeowners who think they might move within 10 years. If you can afford a higher payment in the event of a rate increase and you're planning to move in the near future, talk to your lender about an ARM loan instead of a fixed-rate loan.
Mortgage plan: Home Affordable Refinance Program (HARP)
Ideal for: Homeowners who are underwater on their home but have no intention of filing bankruptcy or selling the property. The Home Affordable Refinance Program is designed for homeowners who have a property with an appraised value that is now less than they owe. If you are current on your mortgage payments and the mortgage is owned or guaranteed by Fannie Mae or Freddie Mac, you are eligible for this program. You may even be able to refinance to a mortgage with better terms that will reduce your monthly payment and help you keep your home.
Mortgage plan: 30-year fixed rate
Ideal for: Homeowners who initially chose an ARM because they expected to move within a few years but have since decided to stay in the home for a longer period of time. This is the most basic and most common loan type and helps you build equity in your home. You may end up paying more interest over the life of the loan, but the monthly payments could be more affordable -- especially if you lock in a great rate.