4 steps to choosing the right mortgage

Posted by  on Oct 04, 2013

While 30-year fixed-rate home loans are still the most popular, particularly among first-time buyers, 31 percent of refinancing homeowners opted to shorten their loan term during the second quarter of 2013, according to Freddie Mac. If you are considering a home refinance and are looking for the lowest mortgage rates, you may want to compare refinance rates for several fixed-rate loan terms and adjustable-rate mortgages (ARMs). Shorter loan terms typically have lower interest rates than 30-year fixed-rate loans, although the spread between the different mortgage types varies.

How do you check which term is best?

1.Check your current loan balance and rate. Where you stand with your current loan has a big impact on your refinancing plans. If your interest rate is already low, you may not want to spend the money to refinance. Instead, you could use a prepayment calculator to estimate the impact of a 'do-it-yourself' refinance; adding extra to your principal balance to pay off your loan faster.

In the first few years of your mortgage you mostly pay interest rather than reducing your principal, so if you're in a relatively new loan you may find that your balance is too large for you to reduce your loan term because the payments would be too high. A smaller balance is easier to pay off in a short time.

2.Decide how long you're staying in your home. If you plan to stay in your home for the long term, refinancing makes more sense than if you plan to move soon because of the cost of a home refinance. On the other hand, if you're sure you'll sell within a particular timeframe, you may want to look into a 5/1 or 7/1 ARM with a low, fixed interest rate for the first five or seven years.

3.Review your financial plans. While you may love the idea of paying off your mortgage faster, remember that paying off high interest credit card debt, funding your retirement and perhaps a college tuition fund should be priorities, too. Your retirement plans should be taken into context when you consider refinancing if you're in your 50s or older.

4.Compare mortgage rates and terms. Fixed-rate mortgage loans are commonly available for 30, 20, 15 and 10 years, but some lenders also allow you to choose your own loan term to match a particular payoff date such as your retirement. Hybrid ARMs, amortized over 30 years, are fixed for the initial period and then adjust according to the caps set by your loan terms. You can use a calculator or consult with a lender to estimate your housing payments at various interest rates and terms. Consider the payment in the context of your overall financial plans and make sure the payment is comfortable. You can always pay extra toward the principal if you find you have more income; unfortunately, if you've committed to too large of a payment, you won't be able to reduce it without the expense of refinancing again.

Hitting the sweet spot for your mortgage loan requires some long-range planning along with some calculations and a review of your current finances, but the benefits can be felt long term as well.

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