Mortgage Refinancing - Understanding Fixed Rate Mortgages

The most common refinancing for mortgages is fixed rate. These loans feature fixed rates and monthly payments, generally for 15-year and 30-year periods. They are popular because consumers balk at the thought of their house payment rising and falling with interest rates. Whenever rates are low, fixed rate mortgages are very affordable.

Refinancing into a fixed-rate mortgage provides the peace of mind of knowing what the mortgage payment will be for the life of the loan (excluding property tax fluctuations).

Fixed rate loan borrowers face a major choice: 15-year or 30 year? For some a 30-year loan makes more sense. For others, a 15-year one does. Here are some pros and cons of each:

Advantages of a 30-year loan:

Offers the chance to borrow money on a long-term basis without having to worry about the interest rates or payments changing.
Monthly payments are lower than those on 15-year loans because the interest is amortized over a longer period.
Lower monthly payments free up money that borrowers can pour into investments that yield more than their homes. For instance, in a bull-market economy, you can make more money investing the difference saved each month in mutual funds or other investment securities.
A higher interest bill increases the amount consumers can deduct at tax time, potentially reducing or eliminating their federal income tax liabilities.

Disadvantages of a 30-year loan:

Borrowers build equity at a very slow pace because payments during the first several years go largely toward interest rather than principal.
The overall interest bill is much higher because of the long amortization term.
The interest rates are higher than on 15-year loans.

Advantages of a 15-year loan:

Borrowers build equity much more quickly due to shorter amortization schedules.
Overall interest bills are dramatically lower than those on longer-term loans.
The interest rates are lower than 30-year loans.

Disadvantages of a 15-year loan:

Monthly payments can be significantly higher than those on 30-year loans.
Restricts homebuyers to a smaller house than they might be able to afford with longer-term loans.

While 15-and 30-year loans are most common there are other options for a fixed-rate mortgage:

Biweekly Mortgages let the calendar work for you. With a Biweekly Mortgage you make a mortgage payment every 14 days, instead of once a month. The result? By making smaller payments more frequently, you will pay off your mortgage sooner and save thousands of dollars in interest over the life of the mortgage.

A Biweekly Mortgage gives you the stability of a fixed-rate mortgage and the convenience of having payments automatically deducted from your checking, savings, or other deposit account.

Key features of the Biweekly Mortgage are:

By making more frequent payments, you pay off the mortgage much sooner. For example, with a Biweekly Mortgage, a loan that normally takes 30 years to pay off will take 22 years to pay off at current interest rates. You will then own the home debt free and have saved 8 years' worth of interest payments!
Your mortgage payment is deducted automatically from your checking, savings, or other deposit account every 14 days—26 or 27 times a year in all. Many people find this an easy way to manage payments, especially if they pay their mortgage at the same time as they receive a biweekly paycheck. The Biweekly Mortgage requires no additional monthly fees, either.

The Balloon Mortgage is a fixed-rate mortgage with a term of seven years. The principal and interest are amortized over a longer period (30 years) than the actual term of the mortgage. At the end of the balloon period, you may pay off the outstanding balance with a lump-sum payment or exercise the option to refinance for the remaining term.

Balloons are not a common option for refinancing. The option to refinance is conditional, meaning you have to meet certain conditions (such as a history of timely payments or no second liens on your property). Conditions may include payment of closing costs and a lender fee, as well as no 30-day late payments in the previous 12 months and no other liens on your property. You must occupy your property at the time of refinancing. You need not re-qualify for this loan when refinancing at the end of seven years as long as the new interest rate is not more than 5% above the current interest rate. The refinance condition is not automatic—you must exercise the option.

Key features of the Balloon Mortgage are:

This mortgage is ideal if you plan to sell or refinance your home within seven years and want a low monthly payment during that time.
The interest rate you pay on a balloon mortgage is usually lower than a comparable 30-year fixed-rate mortgage.
The refinance option provides a "safety net" in case a planned relocation doesn't take place or economic conditions prevent you from moving to a larger home.

With an InterestFirst Mortgage, you pay only the interest, taxes and insurance in the beginning years of your mortgage, which means lower monthly payments. And, because the monthly payments are lower, you may qualify for a larger mortgage amount.

Key features of the InterestFirst loan include:

InterestFirst is available to buy or refinance a 1-unit home that you will live in as your primary residence or a second home.
With InterestFirst, you can select a 30-year fixed-rate mortgage, with an interest-only period of either 10 or 15 years. After the interest-only period ends, either in the 11th or 16th year, your monthly payment increases to include repayment of principal (the original loan amount) and interest. But by then, you have had many years of lower monthly payments and the ability to use your money for other expenses or investments.
InterestFirst Adjustable Rate Mortgages (ARMs) can be originated with interest-only periods that match the initial fixed-period (3-, 5-, 7- or 10- years) or with a 10-year interest-only period. Your payment using the ARM option may even be lower than with the fixed-rate mortgage. And, the 10-year interest-only option will help to reduce the potential payment shock at the end of the initial interest rate period.
You can prepay principal at any time during the interest-only period—for example, if you receive a bonus or increase in earnings. This reduces the future interest-only payments, since you would be paying interest on a lower principal amount. You can also prepay principal during the fully amortizing period. Although these prepayments do not change the scheduled payments or term, they let you pay off the mortgage sooner and thus pay less interest than originally scheduled.