The Best Loan for a Mortgage Refinance

Generally speaking, if it’s time to refinance, you should choose a new home mortgage based upon what direction you think interest rates are headed. If they’re going up, it’s a good idea to lock in a fixed rate. If they’re headed south, it’s savvy to use an adjustable rate mortgage. But if your current loan has no prepayment penalties and you plan to sell within the next few years, you may want to choose a refinance loan based upon how much money you can borrow and what your monthly payments will be. Look for the lowest terms possible—which might mean an adjustable mortgage with a phenomenal introductory rate—but sell and pay off the loan before the "teaser" rate expires and your loan adjusts higher.

The point of refinancing points

Calculating points can be a complicated exercise. You can use calculators or you may prefer to have a trusted mortgage officer, banker, or realtor crunch the numbers for you. Ultimately, your goal is to figure out how much money you’ll save over time.

Here’s an example:

By reducing the interest rate on an 8 percent, 30-year fixed loan of $150,000 by one-and-a-half percentage points, your monthly payment of principal and interest will drop from $1,100 to $948, a savings of $152 per month. If it costs you two points—or $3,000—to get the lower rate, you’ll break even in about 20 months and save $152 per month. That’s more than $1,800 annually.

If you’re staying in the home for a long time, this is a good strategy. But if you plan to sell within the next two years, it’s not worth the trouble.

Best mortgage refinance term

If you plan to sell your home within the next five to 10 years, the term may not make that much difference to you. Take into consideration that different loan terms also require different monthly payment amounts. If you opt for a 30-year loan instead of a 15-year, your monthly payments will be lower while you’re in the house, and you may qualify more easily and find it easier to budget your payments. Even if you don’t plan to remain for the scheduled life of the loan, you should choose terms that fit your current financial situation.

Tips for choosing a refinance
Adjustable rate mortgage