Know The Basics When You Buy or Refinance

If you are currently looking for a new home, chances are that in all the excitement you wont really give any thought to the type of home loan mortgage you take out, instead going with the first one offered to you. This could be a serious mistake costing you thousands, if not tens of thousands. Make sure you know all about the different types of home mortgage loans before you starting looking for that new dream home!

Here are some of the basic types of mortgage loans: 

Fixed-rate home loan mortgage -

As the name suggests, this is a plain-vanilla home loan. Basically you borrow a certain amount over a certain period at a fixed rate of interest. You then pay the same monthly installments for the life of the home loan. The benefit of a fixed-rate home loan is that you can easily budget for the repayments. The downfall of a fixed-rate home loan is that you could end up paying a higher rate of interest than everyone else no one knows what interest rates will be in 15-20 years time!

Adjustable-rate home loan mortgage -

Mirroring the fixed-rate mortgage is the adjustable-rate mortgage. Again, you borrow a certain amount over a certain period, however in this case the interest rate is not fixed, but is adjustable (or floating as you may also hear it called). The upside to adjustable-rate home loans is that the interest rate at the start

of the loan period can be lower than the fixed rate would be. The downside is that it is difficult to budget for, as the amount can change, and you are at the mercy of something outside of your control interest rate fluctuations, which can change quickly.

Hybrid home loan mortgages -

Trying to fill the void left with the downside of the fixed and adjustable/variable-rate home loans, the hybrid home loan lets you fix the interest rate over the first part of the home loan, and then switch to an adjustable/variable rate later. The upside of hybrid home loans is that they allow you to budget for your repayments during the expensive time when you first buy the home. The downside is that if floating rates are much higher than your fixed rate when the switch happens, you could find you are paying a much higher repayment each month.

Should I Refinance?

Refinancing can be worthwhile, but it does not make good financial sense for everyone. A general role of thumb is that refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate.

There are several reasons to refinance your home:

1. To lower the interest rate on your mortgage, reducing your monthly payments and overall cost;

2. To reduce the term or length of your loan, doing so can save you thousands of dollars in interest;

3. To provide a means of consolidating your debt;

4. To draw on the equity built up in the house to get cash for a major purchase or for children's education;

5. Have an adjustable-rate mortgage (ARM) and want a fixed-rate loan to have the certainty of knowing exactly what the mortgage payment will be for the life of the loan.

It is better to refinance if you can get an interest rate at least two percentage points lower than what you are currently paying. However, every situation is different. Some lenders are offering reduced fees or no points. Asking yourself a few questions may help you determine if you can save money:

1. How much can I lower my current monthly payment?
2. How much will I pay in refinancing costs?
3. How much will I still owe on the house?
4. How much am I currently paying each month?
5. How much did I initially pay for the house?

There are other considerations, too, such as how long you plan to stay in the house. Most sources say that it takes at least three years to realize fully the savings from a lower interest rate, given the costs of the refinancing. Itemize all the expenses of the refinance and estimate your new monthly payments. Answering these questions can help you to decide if you should refinance.

Talk with mortgage lenders, real estate agents, attorneys, and other advisors about lending practices, mortgage instruments, and your own interests before you commit to any specific loan.