Refinancing Your Mortgage

Comparing Refinancing Loans

There are several types of mortgage loans that will probably be available to you. After examining your financial situation, or if your financial situation changes, you may want to compare the different refinancing options to see if one of them puts you in a better financial position.

Adjustable Rate Mortgage (ARM) to Fixed-Rate

Refinancing to go from an ARM to a fixed-rate mortgage can be comforting. The peace of mind knowing that your mortgage payment won't fluctuate with changes in interest rates may allow you to sleep easier. A fixed-rate mortgage is best for those who plan on staying in their homes for a number of years. Of course, it may not make sense to do this if the cost of the fixed-rate loan is higher.

Adjustable to Another Adjustable

It may be very tempting to want to switch into another adjustable rate mortgage (ARM) when lenders offer very low introductory rates, called teaser rates. With a teaser rate, your interest rate and monthly payments in early years will be significantly lower than what you are paying now; but, if you plan on staying in your home for a number of years, the rates in later years will probably be the same or (quite possibly) higher than the rate you would have had on your original ARM. So be cautious when considering this.

Fixed-Rate to Adjustable

If you plan on selling your home within the time period that an ARM adjusts (one year, two years, etc.), it may be good for you to go from a fixed-rate mortgage to an ARM. For instance, say you are looking at a five-year ARM. The mortgage rate on that loan will not change until the end of the fifth year. If you are pretty sure that you will sell your home within the five years, you may save money by doing this.

30-Year to 15-Year Loan

There are advantages and disadvantages to moving from a 30-year loan to a 15-year loan. Let's take a look at some.

Advantages to 15-Year Loan

Disadvantages to 15-Year Loan

Interest rate is usually lower.

Your monthly payment is higher—make sure you can afford it.

Allows you to pay down your mortgage faster and build equity in your home.

Depending on the economy and how long you plan to stay in your home, building equity may not be your best investment.

Provides a forced discipline of putting more money each month toward paying down debt.

Reduces financial flexibility... with the higher monthly payment, there is less money around each month. This could be a problem if a financial emergency comes up.

Refinancing: 15-Year Mortgage versus 30-Year Mortgage

The example below compares the potential savings that will result by refinancing a 30-year mortgage to a 15-year mortgage with a lower interest rate or to another 30-year mortgage with a lower interest rate.

 

Current
30-Year Mortgage

New 15-Year Mortgage

New 30-Year Mortgage

Term

30-year

15-year

30-year

Original Loan

$95,500

   

Principal to Refinance (outstanding balance)

$91,000

$91,000

$91,000

Interest Rate

7%

4%

4.5%

Points

 

0

0

Monthly Payment

$635.36

$673.12

$461.08

Years Remaining

24 years

15 years

30 years

Payments Remaining

$182,985

$121,161

$165,990

Amount Saved Over Life of Loan

 

$61,824

$16,995

What does this example show us? Going from a 30-year loan to a 15-year loan kept the monthly payment about the same and significantly reduced the total amount required to pay off the loan. This works great if your goal is to pay down debt faster.

Keeping the loan at a 30-year payment period significantly decreases the monthly payment from $635 to $461 and saves you money over the life of the loan. This works great if you are looking to reduce your expenses or you are looking to have more money to invest.

Of course, you must also consider how long you intend to remain in the house. If it will only be a short period of time, an analysis of the cost of refinancing compared to the projected savings will need to be addressed.

SUGGESTION: If you can't afford the payment on a new 15-year mortgage, consider a 20-year term. 20-year loans are offered by many lenders.

Share Article:
Add to GooglePlus

Securities and advisory services are offered through LPL Financial (LPL), a registered investment advisor and broker-dealer (member FINRA/SIPC). Insurance products are offered through LPL or its licensed affiliates. Heartland Bank and Heartland Planning Associates are not registered as a broker-dealer or investment advisor. Registered representatives of LPL offer products and services using Heartland Planning Associates, and may also be employees of Heartland Bank. These products and services are being offered through LPL or its affiliates, which are separate entities from, and not affiliates of, Heartland Bank and Heartland Planning Associates. Securities and insurance offered through LPL or its affiliates are:

Not Insured by FDIC or Any Other
Government Agency
Not Bank
Guaranteed
Not Bank Deposits or
Obligations
May Lose
Value

 

The LPL Financial registered representatives associated with this website may discuss and/or transact business only with residents of the states in which they are properly registered or licensed. No offers may be made or accepted from any resident of any other state.


Heartland Bank ("Financial Institution") provides referrals to financial professionals of LPL Financial LLC ("LPL") pursuant to an agreement that allows LPL to pay the Financial Institution for these referrals. This creates an incentive for the Financial Institution to make these referrals, resulting in a conflict of interest. The Financial Institution is not a current client of LPL for brokerage or advisory services. Please visit https://www.lpl.com/disclosures/is-lpl-relationship-disclosure.html or scan the QR code below for more detailed information.

BrokerCheck