Refinance

There is a rule of thumb as far as an interest rate drop that would make it worth looking at refinancing. If rates drop 1% to 1.5% from the current rate, that is when you should take a look at refinancing. You should consider the total cost, how long it will take to recoup those costs and how long you actually plan on staying in the house.

 

If you do not plan to stay in your home for more than five years or anticipate borrowing in the near future, opting for a no closing cost mortgage may be more beneficial. Your interest rate will be a little higher, but you won't have to worry about recouping your closing costs, which could take several years.

If you plan on staying in the house a short amount of time, an adjustable rate mortgage (ARM) could be more beneficial since if offers lower monthly principal and interest payments. If you were using a three- or five-year ARM, the rate is fixed for those periods of time. For example, if you have a five-year ARM, the rate is fixed for five years and will adjust to the current rate after the fixed-rate period is up. But, there is borrower protection in the form of annual and lifetime rate caps. So, if you're going to be in the home less than five years, there'd be no reason to pay the higher rate. An ARM can also qualify you for a higher mortgage amount which means you can buy a larger or more expensive house. And, with an ARM, you may not have to refinance when the interest rates drop.

 

Typically a home equity loan that's used as a mortgage is shorter-term (10 or 15 years) than your traditional 30-year fixed-rate mortgage. If you're comfortable making those payments, it's a great option. You'll save a lot of money on closing costs than if you refinanced with a mortgage.  If you plan on being in the house for a while, but are still comfortable with that payment, you'll build equity faster and pay off the loan sooner.

Additionally, refinancing with a home equity loan is a beneficial option if you're looking to do home improvements. Learn more about how using a home equity loan to refinance your mortgage can work to your benefit.