Find your best refinance rates by preparing a strategy before shopping for your next mortgage. In addition to finding your lowest mortgage rate, saving on the interest paid over your loan term is another consideration. Here's why.
Shorter Loan Term Saves on Interest Paid
When considering mortgage refinance options, keep in mind that the shorter your mortgage repayment term, the less interest you'll pay. There are two ways to reduce your repayment term. If you can afford higher monthly payments, a 15-year mortgage typically carries a lower interest rate. You can potentially save thousands of dollars in interest paid over the term of a 15-year mortgage as opposed to a 30-year mortgage. You'll pay off your mortgage faster and won't have to worry about randomly scheduling additional payments to your mortgage balance. LendingTree's mortgage calculators can help with comparing loan terms, estimating mortgage payments, comparing mortgage rates and estimating potential savings on refinance terms you're considering.
If you're not sure you want to commit to higher payments that come with a 15-year mortgage, you can refinance to a 30-year mortgage with no prepayment penalties. This sets the stage for making additional principal payments, also called principal curtailments, at your convenience. This gives you leeway in case of unexpected expenses. You aren't required to pay extra amounts toward your loan balance and you won't be charged a prepayment penalty if you do pay off your mortgage early.
Refinance Rates Vary by Loan Type
When requesting refinance quotes, don't rule out adjustable rate mortgages. If you are planning to retire or relocate in a few years, a hybrid adjustable rate mortgage can help you gain an introductory fixed rate that's below market rates for 30-year fixed rate mortgages. It's important to consider your future plans as well as your tolerance for risk. Investopedia explains how a hybrid adjustable rate mortgage works. After the initial period expires, your hybrid loan will convert to an adjustable rate. The rate is determined by the financial index the lender uses as a basis for its adjustable rate mortgages. The second component of an adjustable rate mortgage is the "margin" charged by mortgage lenders in addition to the index rate. Here's a fictional example. Let's say that XYZ lender uses the ABC financial index, which has a current rate of 2.50 percent and a margin of 1.00 percent. Your adjustable mortgage rate would be 3.50 percent until the next reset period for the adjustable rate. Hybrid loans usually have reset periods of one year. Hybrid adjustable rate mortgages are typically identified with two numbers such as 3/1, 5/1 or 7/1. The first number indicates the length of the introductory fixed rate period in years. The second number indicates the frequency of reset periods. In our examples, the reset period is one year.
There are potential drawbacks to adjustable rate mortgages. Check with prospective lenders to make sure there are no prepayment penalties. Adjustable rate mortgages are subject to economic and financial conditions that affect the financial index used by your mortgage lender. If you prefer the stability of consistent principal and interest payments, an adjustable rate mortgage may not be worthwhile. When comparing adjustable rate mortgages, ask prospective lenders which index is used for calculating your refinance rate and the margin percentage. Rate caps are another important aspect of adjustable rate mortgages. Rate caps are designed to protect borrowers from severe swings in adjustable mortgage rates. There are two types of caps—the first limits how much your rate can increase at each reset period and the second is a lifetime cap that limits how high your mortgage rate can go over the term of your refinance loan. The Consumer Financial Protection Bureau advises paying close attention to rate caps as well as refinancing rates and financial indexes; this will help you find a great deal on an adjustable rate mortgage while limiting how much adjustable refinance rates can change.