Refinacing

You can reduce your total interest costs in one of three ways:

1. Refinance your loan at a lower interest rate.

   If you are paying a higher interest rate on your loan compared to current market rates, you could reduce your total interest costs by refinancing at a lower rate. However, the amount you reduce your interest costs should be greater than the cost to refinance. Generally, this depends on the length of time you stay in your home.

2. Refinance your loan at a shorter term.

   You can also reduce your overall interest costs by refinancing at a shorter term. Unfortunately, your monthly payment will be higher. If you've been in your home for a while and your income has increased significantly, you may want to take advantage of this option to reduce your total interest costs.

3. Refinance with a new ARM mortgage?

   If you currently have an Adjustable Rate Mortgage (ARM) and your rate has adjusted higher, you could reduce your total interest costs by refinancing with a new ARM mortgage loan.

You can reduce your monthly payment in one of two ways:

1. Refinance to extend the term of your loan.

   By extending the term of your loan, you can lower your monthly payment even if rates have remained unchanged. Keep in mind, however, that you will increase your total interest costs for your loan.

2. Refinance from a fixed rate loan to an ARM.

   Another way to lower your monthly payment is to switch from a fixed rate loan to an ARM. Adjustable Rate Mortgages adjust each year based on a market rate index, which means your monthly payments could increase to the amount of your previous loan if the market rates also increase. If you plan to stay in your home a long time, this option may cost you more over the life of the loan.

Adjustable Rate Mortgages are popular loans that provide lower interests and lower monthly payments compared to fixed rate loans. However, ARMs involve more risk since the interest rate typically rises each year and you cannot predict with certainty what your monthly payment will be.

In order to reduce this risk, you can refinance your ARM loan to a fixed rate loan. You may pay a higher interest rate and your monthly payment may increase; however, you will reduce your risk.

You can pay off your loan faster in one of two ways:

1. Refinance your 30-year loan to a 15-year loan.

   By converting your 30-year loan to a 15-year loan, you can pay off your loan faster and reduce your total interest costs. However, you will pay a higher monthly payment. Depending on whether interest rates have fallen, and by how much, the increase in your monthly payment could be worthwhile. Calculate the difference between a 15-year and 30-year loan.

2. Make extra payments each month or year on your current loan.

   If your loan does not carry a pre-payment penalty, you can increase your monthly payment or make an extra payment each year. The amount in excess of your monthly payment goes towards paying down the principal of your loan. If you make an extra payment every year on a 30-year loan, you will pay off your loan in approximately 18 years.

If you have equity in your home, you could refinance at the market value of your property to cash-out your equity. Use the money to remodel your home, pay for your children's college tuition, consolidate debt or any other major expense.