Evaluating Loan Products When Refinancing

Refinancing your home loan is an important consideration, especially in the face of so many different loan products. The loan you choose for the most expensive asset and debt has the power to greatly influence your overall fiscal health – either in a good way or in a negative manner. For example, if you refinance a home but do not plan on staying in the home long enough to actually realize the savings, then you are spending money on something that will net you absolutely no benefits. If your net savings are $100 per month that could be realized after 20 months – as would be the case if you have a savings of $100 in your monthly mortgage payment and costs of $2,000 to actually apply for and receive the new mortgage loan – and you move after 10 months, you are actually operating under a loss.

If you do decide that interest rates have sufficiently lowered to justify a refinance, you have the option of sticking with the kind of loan product you currently have, or to opt for a whole new kind of loan. If your financial situation has greatly improved, you may be wise to turn your 30 year fixed home loan into a 15 year or even a 10 year loan. Conversely, if your finances are more precarious than they were before – but you anticipate that there will be change forthcoming again – a two step mortgage could be the kind of fiscal vehicle that makes the most sense. This kind of loan is another 30 year mortgage, but rather than offering the same interest rate all the way through, it has an initially low monthly payment, usually for about five to seven years, and then the payment increases to make up for the missed principal that was not initially paid.

Consumers who need even more flexibility may opt for adjustable rate mortgages. These may be dangerous, unless consumers are well aware of the amounts a future mortgage payment may actually be. Initially these loans may offer low rates that are well below the interest rates charged by other loan products, such as 30 year fixed rate mortgages. Yet when the times for adjustments come, the interest rate can incrementally inch its way up. While initially this does not appear to be a serious problem, consider that one percentage point change of a $300,000 still adds a significant amount of money to a monthly payment. Making matters worse, these adjustable rate mortgages are frequently chosen to make payments on a more expensive property palatable. When it comes time to adjust upward, this can seriously hurt the pocket book.

On the flipside, the home owner who is also an investor may find that this is a perfect loan vehicle to quickly obtain investment properties with the help of equity found in a primary residence, and while s/he might not plan on keeping this loan for 30 years, it provides the money needed here and now. The same holds true for a balloon rate mortgage that initially keeps payments low but eventually requires a big payment to make up for the money saved.

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