Refinance

After you have decided to refinance, you must decide which type of mortgage to refinance to. This decision can be made by consulting with your mortgage company. To get you familiar with the types of the more common mortgages, we will go over some of them below.

There are two main home loan types are: fixed rate and adjustable rate mortgages (ARM).

Fixed Rate Mortgage
A fixed rate mortgage is where the interest rate of the mortgage stays fixed for the length of the term. Popular terms are usually for 15 or 30 years.

Adjustable Rate Mortgage
ARMs are mortgages that are only fixed for the initial period and then adjust every year based on the mortgage rates that year. For example, a 5/1 ARM, means that a mortgage will be fixed for the first 5 years and be adjustable every year afterwards. Most consumers choose to refinance before their mortgage gets to the rate adjustment period. The common ARMs are 3/1, 5/1 and 7/1.

Interest Only Mortgage
An interest only (I/O) mortgage is an option that can be combined with a fixed rate mortgage or an adjustable rate mortgage. For example, consumers are able to choose such options as the 30 year fixed rate mortgage, 30 year fixed rate interest only mortgage, 15 year fixed rate mortgage, 15 year fixed rate interest only mortgage, 5/1 ARM, 5/1 ARM interest only, etc...

Popular Types of Mortgage Refinance

30 Year Fixed Mortgage
Traditionally, the most popular mortgage consumers opt to use. The mortgage is 30 years in length with the mortgage rate fixed for the entire period. With the housing boom, the prices have shot up the roof in some parts of the country, causing borrowers to look for ways to afford homes that were not previously affordable with a 30 year fixed loan. As a result, ARMs have became more popular with new homeowners over the past few years.

15 Year Fixed Mortgage
Similiar to the 30 year fixed mortgage with the exception of the loan period being 15 years instead of 30 years. Consumers can save quite a bit of total interest over the life of the loan by paying off the loan in 15 years rather than 30 years. The drawback is that the 15 year fixed mortgage monthly payment is higher than a 30 year fixed mortgage.

5/1 ARM
The 5/1 adjustable rate mortgage allows the mortgage rate to be fixed for the first 5 years and each year thereafter, the mortgage rate will adjust according to a mortgage rate index. The 5/1 ARM mortgage rates are generally a little bit lower than a 30 or 15 year fixed. The loans are amortized over the standard 30 year period.

3/1 ARM
The 3/1 adjustable rate mortgage allows the mortgage rate to be fixed for the first 3 years and each year thereafter, the mortgage rate will adjust according to a mortgage rate index. The 3/1 ARM mortgage rates will be a little lower than the 5/1 ARM as well as the 15 and 30 year fixed. The drawback here is that if mortgage rates are considered historically low, going with a 3/1 ARM may not be wise because after the 3 years are up, it is very possible the mortgage rates will be one, two percent or even higher. 3/1 ARMs have been the mortgage of choice for people living in high price areas such as Orange County, Los Angeles, San Diego and other costal communities where home prices have skyrocketed.