Home Loan Basics

Fixed rate loans have a stated interest rate that does not change over the life of the loan, whereas the rates on adjustable rate loans are linked to an index and change as the index rate changes. Many mortgages, such as a 5-Year Fixed (30 Year), start as a fixed rate loan and then convert to an adjustable rate. Adjustable rate loans have shared risk due to the possibility that the interest rate could increase or decrease. However, because you are assuming some of the risk, the lender will generally reward you with a lower interest rate. These loans are best for borrowers who do not plan on keeping the loan for the full term.

Interest-Only loans are a good means of either increasing your home purchasing power or maximizing your flexibility to control cash flow. You can save significant amounts of cash for investment, savings, or other expenditures during the interest only period. This is also a solid strategy to maximize tax deductibility, with more funds available for paying down higher cost, nondeductible consumer debt. With these loans, the minimum payment required covers interest only. You decide how much or how little of the principal to repay each month. These loans should not be confused with negative amortization loans. With Interest-Only loans the principal balance NEVER increases.

If you’re a homeowner, you can borrow against the value of your house with a home equity loan (often called a HEL or loan) or a home equity line of credit (often called a HELOC or a line). Both are essentially a second mortgage.

What's the difference?
A HELOC is a form of revolving credit similar to a credit card. It allows you to draw funds, up to a predetermined limit, whenever you need money. There is generally a minimum payment due each month with the option to pay off as much of the line as you want. With a HEL, you receive a lump sum of money and have a fixed monthly payment that is paid off over a predetermined time period. In each case, the amount you can borrow is based on factors such as your income, debts, the value of your home, how much you still owe on your mortgage and your credit history.

If you have a low, 30-year fixed interest rate you're in good shape. But if any of these Five Reasons applies to your situation, you may want to look into refinancing.

1. Decrease monthly payments
   If you can get a fixed rate that's lower than the one you currently have, you can lower your monthly payments.
2. Get cash out of your equity
   If you have enough equity in your home you can get cash out by refinancing. Just decide how much you want to take out and increase the new loan by that amount. It's one way to obtain money for major expenditures like home improvements and college tuition.
3. Switch from an adjustable to a fixed rate
   If interest rates are increasing and you want the security of a fixed rate, or if interest rates have fallen below your current rate you can refinance your adjustable loan to get the fixed rate you're looking for.
4. Consolidate debt
   You can refinance your mortgage to pay off debt. Simply increase the new loan amount by the amount you need and the lender will give you that cash to pay off creditors. You'll still owe the lender but at a much lower interest rate and that interest is tax-deductible.
5. Pay off your mortgage sooner
   If you switch to a shorter term or a bi-weekly payment plan, you can pay off your home earlier and save in interest. If your current interest rate is higher than the new rate, the difference in monthly payments may not be as big as you'd expect.