Loan Types

summary of loan types for home refinancing

The most popular loan type for home refinancing is the fixed rate loan. Many homeowners that do a refi are getting out of loans that are subject to rate increases. However, some homeowners still consider other loan types. It's good to become familiar with your options

Below are six (6) quick summary guides of refi loan types:

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refi loan types

Fixed-Rate Loans

Fixed-rate conventional mortgages are the popular loan for refinancing. Refi options include the 30-Yr and 15-Yr mortgage loans, depending on the home owner's financial objectives.

Advantages:

  • interest rate and monthly payment amounts are fixed for the life of the loan
  • homeowners can budget how much they need each month for the mortgage payment
  • homeowners like the stability of a product
  • homeowners can easily understand how the product works

Disadvantages:

  • interest rates are slightly higher than ARMs and other special mortgages
  • the average homeowner does not remain in the home for the full 30 years, thus paying more financing charges than with other mortgage loans

15 YR vs. 30YR:
You can choose the standard 30-year fixed rate mortgage or pay off your home loan faster with a 15-year fixed rate mortgage.

  • 30-Year:
    lower monthly payment, higher APR
  • 15-Year:
    higher monthly payment, lower APR

The APR on a 15-year mortgage is about 0.05 to 1.0 percent lower than the standard 30-year mortgage. You will also pay your loan off quicker saving thousands of dollars in total interest charges.

View more detail information and illustrations

(note: links to our companion site
www.SayLending.com)

refi loan types

Adjustable Rate Mortgages

ARMs have lower interest rates than conventional fixed rate loans. ARM's adjust their rates up or down during a given period. This means that your monthly payment may go up or down during your repayment term.

Advantages:

  • the big advantage of ARMs is the interest rate — which can be significantly lower than 30-year fixed-rate loans
  • many consumers select the ARMs when they know they will only remain in the home for five or fewer years
  • homeowners use the ARM when they need to qualify for larger loan amounts
  • ARMs are generally assumable which is a plus when homeowners plan to sell in the near future
  • ARMs rates can decrease in declining interest rate markets making your loan payment even less
  • some ARMs have a convertible feature that allows the borrower to convert the ARM to a fixed-rate mortgage

Disadvantages:

  • the interest rate can fluctuate which makes it hard to budget your finances
  • in rising interest rate markets, your monthly payment can increase significantly
  • some ARMs allow for negative amortization — where caps prevent recovery of the full cost of the loan
  • convertible features can be expensive and may charge a higher interest rate than current prevailing rates

View more detail information and illustrations

(note: links to our companion site
www.SayLending.com)

refi loan types

Hybrid-Combo Fixed Loans

Hybrid Loans are a combination of fixed-rate and ARM. These ARMs attach a delayed adjustment period during which the initial period is fixed. Hybrids start out at fixed rates loans, adjusting to ARM after a set period of years.

Advantages:

  • gives the homeowner a lower rate than fixed-rate loans plus lower risk that the 1-year ARMs
  • many consumers select the Hybrids when they know they will be in the home for a select period of time
  • homeowners use the hybrid to lower their rate and to qualify for larger loan amounts
  • Hybrids and ARMs are generally assumable which is a plus when homeowners plan to sell in the near future.

Disadvantages:

  • hybrid rates are typically higher than 1-yr ARMs
  • rates will adjust at the end of the initial period that could raise your payment
  • interest rates will adjust annually after the initial period making it hard to plan your finances
  • in rising interest rate markets, your monthly payment can increase significantly after the initial fixed-rate period

View more detail information and illustrations

(note: links to our companion site
www.SayLending.com)

refi loan types

Interest-Only Mortgage Plans

Some refi applicants switch to interest-only mortgage loans to get the low rate. They then manage their finances to pay down the principal.

Advantages:

  • you pay interest-only payments on your mortgage loan for the first five or seven years of your 30-yr amortized loan
  • lower monthly payments
  • you can afford your first home or a higher priced home by using interest-only loans
  • your monthly savings can be used to pay the principal or other debts

Disadvantages:

  • no principal being paid during the interest-only period
  • if home values decline, you could lose money
  • once the interest-only payment term expires (usually in 5-7 years or more), your monthly payment will increase substantially.

View more detail information and illustrations

(note: links to our companion site
www.SayLending.com)

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