Which refinancing option is best for you?

Are you refinancing primarily to lower your rate and monthly payments? Your best option might be a low fixed-rate loan. You may have a fixed-rate mortgage now with a higher rate, or maybe an adjustable rate mortgage (ARM) where the interest rate varies. Unlike your ARM, when you qualify for a fixed-rate mortgage, you lock that low rate for the life of your loan. This is especially good if you don't think you'll be moving within the next five years. On the other hand, if you do see yourself moving within the next few years, an ARM might be the best way to lower your monthly payment.

Are you refinancing primarily to cash out some of your equity? You may want to pay for home improvements,  your child's college tuition bill, or take your dream vacation. You may qualify for a loan amount higher than the balance remaining on your current mortgage. If you've had your current mortgage for a number of years and/or have a mortgage whose interest rate is higher, you may be able to do this without increasing your monthly payment.

Do you want to cash out equity to consolidate other debt? If you have enough equity in your home, paying off other debt with higher interest rates than the interest rate on your mortgage (for example, credit cards, home equity loans, car loans, student loans, etc.) may mean you save hundreds of dollars in interest.

Do you want to build equity more quickly, and pay off your mortgage sooner? Consider refinancing with a shorter-term loan, such as a 15-year mortgage. Your payments will be higher than with a longer-term loan, but in exchange, you will pay substantially less interest and will build equity quickly. If you have had your current 30-year mortgage for a number of years and the loan balance is relatively low, you may be able to do this without increasing your monthly payment or even lower it. For example, you have a $150,000 30-year mortgage at eight percent. Your payment is about $1,100, exclusive of taxes, insurance, etc. If your balance today is down to $130,000, you might take a 15-year mortgage at six percent and have an almost identical monthly payment. This is a great option for people whose main goal is not to save money on their monthly payment but rather to build equity and pay off their home quickly.