The Most Common Refinance Home Loan Types

It’s important to know your options. There are hundreds of home loan products on the market; all with different fees, interest rates and features. Let’s have a look at the most common home refinance loan types.

Adjustable Rate Mortgage:

As the name suggests, this loans interest rate changes through the life of the loan. The initial interest rate of the loan is fixed for a set amount of years and then it adjusts according to the economic index it is linked to. This means it can go up or down after the fixed interest period. The initial fixed rate of the loan is typically lower then that of a fixed rate home loan. Refinance to this if you are certain interest rates will stay low or drop.

Fixed Rate Mortgage:

This loan fixes your interest rate for a set period of time. This allows you to budget effectively and gives you peace of mind for that period; knowing your monthly payments won’t change. The downside is this loan comes with less features, therefore less flexibility. Most don’t allow you to make extra payments and redraw on the additional funds.

Balloon Home Loan:

A balloon loan is a mortgage with a fixed interest rate for a set period of years. This period of is typically short, around 7 to 10 years. The advantage of the balloon loan is that the interest rate is almost as low as those found with adjustable rate home loan. Refinance to this with caution. The disadvantage is that when the term is up, the loan is repayable in full. Caution and careful planning needs to be taken to enjoy the advantage of this type of loan without being hurt by it's disadvantage.

Home Equity Loan:

These fixed rate loans that allow you to tap into your equity; providing you with the funds to renovate, invest in shares, managed funds etc. The annual percentage rate (APR) will stay the same for the life of the loan, so your monthly payments will never vary. However care needs to be taken with these types of loans as it results in a reduction in the equity you have built up in your home.

Line of Credit:

A line of credit loan basically allows you to draw on your mortgage balance up to the original amount borrowed. So you can tap into the equity you have in your home. In addition, monthly repayments are usually interest only. Essentially, you can borrow what you want at lower interest rates then credit cards and personal loans, and pay it back when you want. Care needs to be taken with this type of loan, as again, you can reduce the equity you have built up in your home.