When to Refinance
One common type
of refinancing is when you have an adjustable-rate mortgage
(ARM) and you refinance to a fixed-rate mortgage. Your mortgage
payments with an ARM adjust with changes in the market rates;
so when interest rates go up, your monthly payments likely
go up. But with a fixed-rate mortgage, your interest rate
stays the same for the entire term of your loan. The predictability
that comes with locking in the same interest rate for as long
as you live in your home is one reason why changing from an
adjustable-rate mortgage to a fixed-rate loan is one of the
more popular refinancing choices -- especially when interest
rates are falling.
Or, you may have
taken advantage of the traditionally lower interest rates
in the first years of your ARM and now that your monthly mortgage
payments have increased, refinancing to a fixed-rate loan
looks attractive. You should work with your Fannie Mae-approved
lender to compare the financial index, margin, and any rate
caps in your existing ARM with current market rates before
you decide to refinance to another type of ARM. It is important
to understand how often your mortgage will adjust and how
much your payment can change with each adjustment and over
the life of the loan.
You may be interested
in changing from one kind of ARM to another or refinancing
with the same kind of ARM to get a lower interest rate. Be
sure to ask your current lender whether any conversion terms
apply or if there are costs to convert to another type of
mortgage.
When to Refinance:
Scenarios
Another reason
to refinance is to use the equity in your home perhaps for
a major purchase or a child's education. You've been building
equity in your home since you first started making monthly
mortgage payments. Part of your payment was used to pay principal
-- helping you build equity -- and the rest was used to pay
such items as interest and taxes and insurance.
Often referred
to as a "cash-out" refinance, drawing on the equity
in your home provides an easy way to get cash you may need
for other purposes.
