3 Mortgage Refinance Options to Consider

There are 3 mortgage refinance options that are available to borrowers when refinancing their home. Some homeowners are looking to cut their recurring expenses by lowering their monthly mortgage payment. Another group of people are looking to shorten the length of their loan, which can drastically lower the price paid for the home. Finally, there are a group of borrowers who are interested in a cash out refinance to cover a large expense.

Here are some additional details for the mortgage refinance options available for most homeowners.

The most common mortgage refinance option available to a homeowner is lowering your monthly mortgage payment. The monthly payment on a 30 year fixed rate loan of $200,000 at 6% would cost $1,199.10. If you were to refinance to a lower rate of 5%, your monthly payment would drop to $1,073.64. That is a monthly savings of over $125 per month.

Refinancing your existing mortgage to a lower rate is a great way to save money each month on your largest expense. Provided you live in the home long enough to recoup any refinance closing costs, a lower rate can be a smart financial move. You can increase your savings on a refinance by using your extra savings to pay down your principal and shorten the terms of the loan.

Another mortgage refinance option for homeowners is to reduce the number of payments needed to pay off a home. A 30 year fixed rate mortgage requires 360 monthly payments, consisting of principal and interest. At the beginning of the loan, the monthly payments are made up mostly of interest and some principal. As the mortgage matures each month, the amount of principal paid increases and the interest decreases.

The amount of interest that will be paid on a 30 year mortgage for $200,000 at 6% would equal $243,319.12. The interest paid in this example would account for almost 55% of the total cost of owning the home. The other 45% would go towards paying down the principal.

If you were to refinance to a lower term, chances are you would get a lower mortgage rate. However, even if we refinanced the same $200,000 for 6% on a 15 year mortgage, the amount of interest paid becomes much less. The total interest paid on the 15 year mortgage for the same interest rate and loan amount would equal $103,788.82. The total interest only accounts for 34% of the cost to own the home.

As you can tell, shortening the length of a loan can drastically reduce the amount of interest you will end up paying. A homeowner who refinanced from a 30 year fixed mortgage to a 15 year would have saved almost $140,000 in interest alone. Provided you can make the higher monthly payments that come with a shorter term loan, this can be one of the best mortgage refinance options available to help homeowners save money.

Prior to the housing crisis, a cash out mortgage was one of the most widely used mortgage refinance options. Now that lending requirements have gotten tighter, it has become more difficult to get cash out from refinancing a home. Even though it has become more difficult, borrowers with good credit who have over 20% equity in their home may still be eligible for cash out.

Homeowners can leverage the equity in their home to cover large expenses like medical costs, college tuition, or to pay for a home remodeling project. The lump sum cash payment made to the borrower is added back into the total loan amount as if it were part of the home. While this option can help finance large expenses, it is not normally recommended by financial experts. Be sure to understand all your options if you are considering a cash out refinance.

There are many different mortgage refinance options that can benefit a homeowner in today's housing market. If you are interested in lowering your monthly house payments or knocking off years on paying off your mortgage, a home loan refinance can help. Even those who are looking for some extra cash to pay off a large expense can benefit from refinancing.

What other mortgage refinance options are available to homeowners?