Renegotiating your first mortgage can get you better terms and rates. You may even be able to put some of your home’s equity to other uses. If you are unhappy with your current mortgage terms, there are a number of different refinance options available. While there are advantages and disadvantages to each, the new mortgage terms that will work best for you depend on your individual situation. No matter how you look at it, the primary benefit of refinancing your home loan is the flexibility it offers you to make changes.
Talk to your mortgage lender. Ask about refinancing an adjustable rate mortgage (ARM) to a fixed rate mortgage. This could be a smart move if the next interest rate adjustment will increase your monthly payments and you can get a fixed rate mortgage at lower interest. Another option is to refinance to another ARM that offers better terms than your current loan. The Federal Reserve Board suggests inquiring about an adjustable rate mortgage loan that offers smaller interest rate adjustments or lower payment caps.
Refinance a fixed-rate mortgage loan to get a lower interest rate, especially if your credit score has improved. Paying a lower interest rate will usually lower the monthly mortgage payment. Less interest also allows you to build equity in your home more quickly. Depending on your financial situation, consider either increasing or decreasing the term of your mortgage when you refinance. Kiplinger recommends planning to stay in your home long enough to recover the costs of refinancing the mortgage loan. Otherwise, it may not be worth it. Generally, the costs associated with refinancing total between two and four percent of the loan amount.
Choose a cash-out refinance if you want a mortgage loan greater than what you have now. A cash-out refinance allows you to access the equity in your home to make home improvements or pay down other debts. Like other refinance options, there may be loan fees and closing costs. Lenders sometimes charge a higher rate of interest on a cash-out refinance.
Find out if you qualify for a loan modification under the Making Home Affordable Modification Program (HARP), especially if your home has decreased in value, but you are looking to refinance to a lower interest rate. In order to be eligible for a refinance loan, the home must be your primary residence and you must never have missed a payment. Fannie Mae or Freddie Mac must own or guarantee your existing mortgage loan. In addition, the amount you owe on your first mortgage must not exceed 125 percent of the home’s current market value. You must also have the ability to make the new mortgage payments.
- Taking out a mortgage for a longer term decreases your monthly payment, but you end up paying back more interest over the term of the loan. Shorter-term mortgage loans typically offer lower interest rates, which means that your monthly payment could be higher because you pay more of the principal each month.
- Although refinancing costs vary among lenders, you may be required to pay an application fee, loan origination fee, appraisal fee, inspection fees, points and closing fees in addition to other costs.
- While HARP will not reduce the principal amount you owe on the first loan, it will save you money by reducing the amount of interest you pay over the length of the loan. A lower interest rate may mean lower monthly payments as well.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.