Below is a continuation of our focus on traditional refinancing options for consumers. Please be advised that new legislation has caught steam in Congress that would put open up an ability to refinance through new initiatives with FHA loans to millions of Americans.

Fixed Rate Mortgage—Borrowers who are preparing to permanently stay in their home often choose a fixed rate mortgage to refinance. The most popular terms are 30-year or 15-year fixed. Borrowers who like stability and no surprises tend to go for fixed rates because the rates are steady.

One drawback, however, is that mortgage payments will go up if borrowers refinance an existing loan for a shorter term. On the other hand, borrowers will ultimately end up paying more principle and less interest, which means that the equity of the home starts to add up.

Adjustable Rate Mortgages, or ARMs—In this option, the interest rate of the mortgage adjusts over a period of time, eventually resulting in a higher mortgage monthly payment. An ARM is a great refinancing option for borrowers that foresee an increase in income, if the fixed rate is too high, or for those planning on living in their home for a short period of time.

The interest rates for ARMs are usually lower than those carrying a fixed rate. Some choose ARMs because they usually do not have to pay prepayment penalties if they choose to refinance in the future. However, some struggle with their ARMs if interest rates drive their mortgage rates to significantly increase in a short time period.

Many homeowners are choosing to refinance their homes during today’s unpredictable economy.  Paying off credit card debt, helping pay for college, or freeing up cash for home improvement are some of the more popular reasons.  Refinancing, by definition, is where an existing debt is replaced by a new debt obligation under new terms. Fortunately, borrowers have several options available, each with its own strengths and weaknesses.

·         Rate and Term Refinancing—Under this option, borrowers refinance the mortgage they currently have in order to get a better interest rate or loan term. The new interest rate will hinge on how much is being borrowed and the length of the loan term.   Borrowers often take advantage of this option when interest rates decrease.

·         Cash-Out Refinancing—This option entails extracting the equity borrowers have in their homes to pay down debt.  The money can be used how borrowers desire, but a common reason for cash-out refinancing is to make home improvements. Borrowers should be aware that cash-out refinancing is not without risks.  It can lead to higher monthly payments, and lenders sometimes charge higher interest rates because the borrower is taking out a new loan.

• Split Premium Insurance—In this option, the borrower purchases a portion of the insurance by either paying out of pocket or financing, and then pays a smaller amount on the monthly premium. Some find this option attractive because it offers flexibility for the homebuyer and the lender.  Mortgage payments may even be lower because the premium can be paid by a third party or at closing.  Borrowers may also benefit from a split premium tax write-off.

• Standard annual premium—This option requires that a certain amount be paid at closing, usually the total cost of the first year of insurance.  Some borrowers like the standard annual premium because they get the insurance cost out of the way in the first year, and the renewal in the second year and beyond often leads to lower monthly payments.  Some companies offer tax benefits for choosing this plan as well.

More thoughts

Remember, mortgage insurance is designed to get buyers into homes faster by avoiding a large down payment.  Keep in mind the following when you’re choosing a certain type of mortgage insurance:

• The home loan amount
• Estimated monthly payments
• Local housing trends

With careful consideration of your personal circumstance, along with the benefits and disadvantages of each type, you can choose the mortgage insurance that is right for your home.