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.

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The 7 Habits of Highly Effective Mortgage Brokers

Honesty is the most important aspect in dealing with mortgage brokers. Unfortunately not all brokers are honest. Being aware of the following good practices will help you pick the best mortgage broker and get the best refinance deal.

Habit 1: Not favoring their own loan product

You need to be aware if the mortgage broker is also a lender, i.e. do they have their own loan products? If they do, and they offer there own product, there needs to be a clear, understandable reason why their product is the best choice for your situation.

Habit 2: Unbiased lender choice

Mortgage brokers get commission from the lender you end up borrowing from. You will need to ask them to be up front about the amount of commission they are receiving from the lender. The best mortgage brokers are honest and won't mind you asking this question. The dishonest ones will think twice about doing the wrong thing by you.

Habit 3: Giving you the real cost of the mortgage

Make sure the broker provides you with the annual percentage rate (APR), when looking at or comparing any home loan products. The annual percentage rate shows you the real cost of a home loan by taking into consideration all the foreseeable fees and charges associated with the loan. This is so you can easily compare home loan products.

Habit 4: Providing all the information

You need to know the whole deal. What is the whole service provided by the broker. Do they provide ongoing service and assistance after you secure your loan? If so, find out for how long. Also, what are the fees involved? Theirs and the lender’s. The best mortgage broker will make this clear before any papers are signed.

Habit 5: Insuring client understanding

You need to understand what the benefits and the drawbacks are for you. The best mortgage brokers will explain this to you in a clear way, so you can understand it. This is so you can weigh it up and decide for yourself if refinancing is actually in your best interest. As stated inDangers of Refinancing there are some bad practices out there, e.g. churning. Making sure you understand the benefits and drawbacks will make it impossible for you to fall victim to this practice.

Habit 6: Being insured

The brokers need to have their own professional indemnity insurance? This protects professionals against liability claims resulting from negligent work. All lenders will have it. However the brokers should not assume they are covered by the insurance of an umbrella organization. The broker needs to know for sure if they are or are not protected.

Habit 7: Being qualified

Is the broker qualified to give you lending advice? All countries have reputable organizations that regulate their mortgage industry and can provide brokers with membership or certificates of credentials, provided they undertake certain courses. Make sure the broker your dealing with has the proper membership or credentials and is qualified to refinance home mortgages. In the United States the American Association of Residential Mortgage Regulators (AARMR) and National Association of Mortgage Brokers (NAMB) are two such companies.

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Common Dangers of Refinancing Your Mortgage

The main danger of mortgage refinancing comes from a lack of awareness. If your not aware of what you want from refinancing, and the pros and cons of a recommended deal, then you are open to being taken advantage of by unethical mortgage brokers.

Does this mean you shouldn't use mortgage brokers? No, there are bad eggs in every industry. It just means you should make sure your are aware of the pros and cons of the deal you are being recommended. Mortgage refinancing is not for the uninformed. You need to pick your broker carefully.

You see to find the best mortgage refinancing deal you need to compare the pros and cons of a lot of different options, loans and lenders. To do this yourself would be overwhelming and very time consuming.

Your bank won't do it for you, as they will defiantly be biased and recommend their loan products. That's why it's good that we have mortgage brokers to do this for us. It's there full time job to do this well.

However, as I mentioned earlier their are bad eggs and bad practices. One such bad practice is called churning. Churning is where mortgage brokers refinance a loan even though the benefits do not outweigh the drawbacks for the borrower. They do this with total disregard too the borrower, just so they can get extra commissions.

Awareness is the key here. Just be aware about the pros and cons of a recommended deal. Also be aware of how these bad mortgage brokers operate. Read the following section,How Pick the Best Mortgage Broker, to have a good guideline to picking your mortgage broker. With the right guidelines and the right information this is an easy process.

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Learn If You Should Refinance Your Mortgage?

If you've ever asked yourself the question, "Should I refinance my mortgage", the answer is, you should DEFFINTLY look into it. Not only could it give you more to live on month to month, but it could also save you thousands off your loan in the long run.

A recent survey produced some disturbing results on the state of mortgages in the United States. The report showed that more then half of property owners are either paying too much for their mortgages or are locked into mortgages that are clearly unsuitable for their needs, income level or financial goals. "Should I refinance my mortgage" is clearly a questions more americans should be asking themselves.

Research also indicates that the average percentage of some ones income that goes to mortgage repayments has risen 12.6% from ten years ago. That's not leaving today's property owners much to live on.
If you don't relate to these circumstances, there are plenty of other reasons why refinancing could still be in your best interest.

Let’s face it, things have probably changed in your life since you originally obtained your home loan. What worked for you then might not be working for you now. Refinancing allows you to change the terms of your mortgage to suit your lifestyle now.
Here are the main reasons why you should look into refinancing.

Save thousands:

It is possible to pay thousands less on the life of your mortgage by refinancing to a better deal. Whether you are able to secure a home mortgage with a lower interest rate, fewer fees or more features to repay quicker, saving money in the long run is a real possibility.

Lower your monthly payments:

Are you struggling to pay your monthly mortgage payments? Well, aside from changing to a lower interest rate, there are a few other options. One is to refinance the remaining principal at the original length of the loan. For example, say you borrowed $200,000 on a 25 year term and you are 10 years down the track with only $125,000 left on the mortgage. If your monthly payments are too much, refinancing the $125,000 back on a 25 year term loan will greatly reduce them. If it relieves you of the stress of meeting your bill month to month it could be a very worthwhile option.

Consolidate your debts:

Are you struggling to manage your debt? Paying way too much in interest? One of the easiest ways to handle credit card and high interest debt is to refinance it into your mortgage. Simply refinance what you owe in total, including credit card debt and all other high interest loans, and only pay the low interest rate incurred by your home mortgage. Let’s say you still owe $100,000 on your home mortgage and in addition owe $20,000 in other debt. You then refinance for $120,000. This way you can pay off the $20,000 that was incurring a high interest rate, at the low rate of your home mortgage. Not only will this ease your financial situation, it will save you a lot of money from interest you now no longer have to pay.

Provide spare cash:

Do you need some money? Want to renovate to add value to your property and/or improve your living arrangements? Well, refinancing is a great way to gain access to the equity sitting in your home. Consider a switch to a Home Equity or Line of Credit loan as a way to do this. This would allow you to renovate your home, buy that new car, or do anything you like with the money.

Pay off your home mortgage sooner:

Want to own your home as soon as possible? Or have you had an increase in salary and want to get your money working more effectively for you. Why not refinance to a 100% Offset or an All in One home loan? These types of loans can greatly reduce the amount of interest you pay on your mortgage. In addition to this, the option to pay more each month can greatly reduce the time it takes you to own your home.

Gives you flexibility:

Want options? Need to minimize how much you pay each month and have the option to borrow more when you need it? Then consider refinancing to a Line of Credit loan. Mainly an Interest only loan, this allows you to tap into your equity, and will give you ultimate flexibility with your finances.

Increases your financial security:

Worried about interest rates rising? If you’re on a Adjustable Rate home loan you might want to refinance to a fixed rate loan. This will give you peace of mind and financial security, especially in volatile times knowing that your monthly payments will remain the same.

Provide Opportunity to invest:

Want to invest? Get your money working for you? By refinancing you can gain access to the equity you have built up in your home. A switch to a Home Equity or Line of Credit loan would allow you to draw on the equity you have built up. You would then have the money you need to invest.

So you can see why there are many reasons why refinancing can seriously benefit you. Next time you ask yourself the question: "Should I refinance my home mortgage?", you owe it to yourself to check it out. However the ultimate answer to the question is in the maths. If the numbers add up, and are in your favor, then it is obviously worth it. Use our refinance loan calculator to if you will benefit from refinancing your mortgage.

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Refinance to an ARM?

Borrowers who took out adjustable rate mortgages three or four years ago have seen their loan rates move with financial indexes to about 3%. However, with analysts predicting that rates on mortgage loans of all types should increase in the coming years, even happily ARMed homeowners are contemplating a switch to a fixed-rate mortgage, according to a recent report in The Wall Street Journal.

Are ARMs Dead?

Maybe.

Data compiled by MortgageDataWeb.com, a Virginia-based marketing firm for the real estate industry supports this. The number of newly-originated ARMs is down, but so is the number of new mortgage originations of all types–from 322,390 in May 2005 to only 77,222 in November 2009. However, the number of ARM originations has plunged like a Hummer off a cliff–from 146,852 in May 2005 to a paltry 2,225 in December 2009.

Five years ago, in March 2005, 45.75% of all purchase home loans were ARMs. But by December 2007, only 7.21% of all new mortgages were, and that share hasn’t exceed 9.0% in any month since then. ARM originations hit a low of 2.85% in February 2009 before bouncing back at the end the year to 4.52%.

ARMs are no longer a popular refinance vehicle either–the number of homeowners seeking an ARM mortgage refinance has deflated from over 60% in early 2005 to less than 1% at the end of 2009, even though mortgage lenders were offering 5/1 ARMs (fixed for five years, and adjustable annually thereafter) at rates as low as 3.25% to highly-qualified borrowers.

ARMs Are Still a Viable Choice for Many

According to Pew Research, 63% of people do not remain in their home towns, most frequently citing economic opportunity as the reason for moving. And the more educated or affluent you become, the more likely it is that you will move. Furthermore, younger people may change houses even if they stay in the same community–as they start families or earn more, many desire a change of address as well. So if the odds are that you’re going to change homes in the next five years or so, why not opt for a hybrid ARM and save a full percent on your interest rate?

How Much Can You Save?

On a $350,000 mortgage, the difference between a 4% mortgage and a 5% mortgage is $208 a month. Over a five year period, that’s $12,480–a good start on your future kid’s college fund!

In mortgage lending, there’s no one-size-fits all home loan. Make sure your lender considers your unique situation when making recommendations.

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Mortgage Refinancing Steps

Before you refinance your mortgage, it's a good idea to make sure you understand all the in's and out's of the process.That the whole aim of this site - to get you up to speed on refinancing with good unbiased information. This is the by far the best way to make sure you get the best deal and have a happy home refinance.

Step 1: Should you refinance your mortgage?

There are many situations where home loan refinancing can be a benefit to you. From saving thousands, consolidating debt to tapping into your home equity, refinancing could be the solution to your problems. Read our article Should I Refinance My Mortgage to see if refinancing your home loan is for you. You can also use our Refinance Loan Calculator to see if the numbers add up and it is in your best interest to refinance.

Step 2: Be aware of the dangers of mortgage refinancing

As in any industry there are some bad eggs in the mortgage broker community. These dishonest brokers put their personal profit before your financial well being. To make sure you don't get ripped off make sure you read our article Dangers of Mortgage Refinancing and become aware of the how to avoid this potential pitfall.

Step 3: Learn how to pick the best mortgage broker

To get the best mortgage refinancing deal you need to deal with an honest broker that genuinely has your best interest in mind. These brokers usually follow certain practices when dealing with their customers. Read our article How to Pick the Best Mortgage Broker to find out what these practices are.

Step 4: Understand the different mortgage loan types

Home loans come in many shapes and sizes. Each home loan type serves a different purpose. What loan is best for you depends on your situation, and the reasons why your refinancing your mortgage. Flexibility and having the option to repay your mortgage faster might be more important then having stability of your repayments. Read this list of the most commonHome Refinance Loan Types to understand what your options are.

Step 5: Find a mortgage broker

Armed with this essential home refinance information you can now safely find a broker to refinance your home loan. If you want, feel free to take advantage our Refinancing Right team's hard work and use one of our Recommended Brokers.

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