Mortgage Refinance, HELOC, ARMs, Oh My! Which Mortgage is Best for You?

With today’s multitude of mortgage loan options, it’s easy to confuse which type is best for you. Hearing about short sale, loan modification, adjustable rate mortgage (ARM) and fixed-rate mortgages can be dizzying. Plus if you already own a home and want to lower your current mortgage rate, what steps do you take?

Interested in a First Mortgage? Consider the Basics

Before you dive into rates and terms, consider your financial situation first:

1. Think about the future and your tolerance for risk. Before diving into any mortgage, ponder where you will be in the next 10 to 20 years. Questions to ask include:
   • Will I stay in the home for more than 10 years or plan to sell?
   • How much house can I afford on a fixed rate mortgage?
   • Will my income increase in the next five to 10 years?
   • Do I have the means and desire to refinance in the future?
   • Am I comfortable with unknown financial factors?
Because adjustable mortgages have rates that change to reflect current market conditions, your payments could be lower or even higher than what you initially anticipated. Borrowers may be interested in an adjustable rate mortgage because the rate and payments are typically lower than fixed-rate, however the borrower must be able to stomach being bound to market conditions after the introductory period.
2. Check your credit score before going rate shopping. Your credit score directly impacts what type of rate you can receive. Most mortgage brokers assign the best rates to a score in the 700’s or above, however others will entertain scores in the 600’s. Each mortgage broker brings something different to the table, that’s why it’s important to gather several quotes.
3. Explore market rates and use mortgage calculators to determine how much house you can afford. Remember, if you go with a fixed mortgage rate, you can lock in the rate and know what your payment will be for the long haul. In today’s economic environment, known financial variables are considered to be gold to many borrowers.
4. Compare and contrast fixed and adjustable mortgage types. That’s right, there are different fixed and adjustable rate mortgage (ARMs), each one delivering a different result. For example, if you go with a fixed rate, you have the choice between a 15 year and a 30 year product. The 15 year is often associated with a lower rate, but you have higher monthly payments.
   In the case of ARMs, you have to decide how long you want your payment to be fixed and when it will adjust. For example, a 5/1 ARM has a fixed interest rate for the first five years then it adjusts every year for the next 25 years. This is another case where a mortgage calculator comes in handy. If the over ARM risk appears to be too high but you still want to pursue an adjustable mortgage, consider a FHA ARM, which provides you with less risk than a regular ARM.

Which Second Mortgage Choice Is Best for You?

Although somewhat of the same animal, second mortgages offer different options and choices. Second mortgages are aimed at those who want to revise their current mortgage rate and terms. Although obtaining a second mortgage is somewhat similar to first mortgages, your choices will vary:

1. Consider the future and check your credit. You still need to ascertain how long you will stay in your home and if you plan to see an income increase. Additionally, your credit may have changed since you sought a first mortgage so review your credit report before shopping mortgage companies.
2. Use mortgage calculators to compare and contrast rates. Determine if refinancing or modifying your loan will provide a direct benefit. Integrate refinancing fees, tax rates and deductions to determine your savings.
   In today’s rate environment, most homeowners are seeing a cost saving benefit to refinancing or modifying their mortgage loan. Plus with the myriad of government backed and traditional plans available, the majority of borrowers are seeing a direct savings.
3. Determine if mortgage refinance or modification is best. While both result in a lower mortgage payment, modification is the re-negotiation of your current loan, whereas refinance is a new home loan.
   Because mortgage loan modification requires a mess of paperwork and the borrower must qualify, many homeowners will seek mortgage refinance first. Additionally, a mortgage refinance loan can close within 30 to 60 days--modifications can take up to six months. Borrowers often seek modification if they have a tarnished credit history and cannot qualify for refinance. Additionally, the upside to modification are less upfront fees.
4. Shop mortgage companies to find the best rate and lowest closing costs. Perform the same due diligence as you would when seeking a first mortgage loan. With any loan, don’t forget to include closing costs and additional fees such as an appraisal (you need another one even if you are refinancing).