Change Your Mortgage Type

Change Your Mortgage Type

Refinancing your home mortgage gives you the opportunity to change your mortgage type.  It is important to know the type of mortgage you have and whether it ideally suits your needs.  People change mortgage types to

 

  • Shorten the time to pay off the loan.
  • Change from an adjustable-rate mortgage to a fixed-rate mortgage.
  • Discontinue mortgage insurance.

Payoff Your Loan Sooner

While there are other ways to pay off your loan sooner, most people choose to move from a 30-year mortgage to a 25-year, 20-year, or even 15-year payoff. Your payment will increase with both of these options but your savings in terms of interest paid to the lender will be meaningful. On a $250,000 mortgage,

Mortgage Rate

  • 4.5 Percent
  • 5 Percent
  • 5.5 Percent

Monthly Payment

For 15-year mortgage

  • $1,912
  • $1,977
  • $2,042

Monthly Payment

For 30-year mortgage

  • $1,267
  • $1,342
  • $1,419

The difference in the payment means less for the lender and more for you. That is 15 years of interest you will no longer have to pay.

Amortization Schedule

An amortization schedule is helpful, too, in looking at your principal and interest. Here is an example of what you might see for that $250,000 mortgage at 4 percent with a 30-year payoff.

Payment

  • 1
  • 2
  • 3

Amount Paid

  • $954.83
  • $954.83
  • $954.83

Principal Paid

  • $288.16
  • $289.12
  • $290.09

Interest Paid

  • $666.67
  • $665.71
  • $664.74

Balance

  • $199,711.84
  • $199,422.71
  • $199,132.62

Here is an example of what you might see for that $250,000 mortgage at 4 percent with a 15-year payoff.

Payment

  • 1
  • 2
  • 3

Amount Paid

  • $1,479.38
  • $1,479.38
  • $1,479.38

Principal Paid

  • $812.71
  • $815.42
  • $818.14

Interest Paid

  • $666.67
  • $663.96
  • $661.24

Balance

  • $199,187.29
  • $198,371.87
  • $197,553.74

Notice the money is used mostly for interest in the beginning and later more goes to pay down the amount you borrowed. As the balance goes down, the interest being charged gets lower, so the remainder of your monthly payment is paying off more of the principal.

Switch from ARM to a Fixed Rate

Adjustable-rate mortgages or ARMs are an attractive option due to the lower mortgage interest rate offered. You can usually get a very low rate for a short time, usually three to five years, and then the rate adjusts based on an index that reflects general economic conditions. The lender chooses the index to use and adds a margin, a percentage number the lender chooses to set your new rate after expiration date. So, at the end of a three-year ARM your rate will be

IndexMarginNew Rate

Your new rate will typically last for one year, but you need to ask specifically how often your rate might change. Your rate can increase a lot, or it may decrease.

Adjustable rates are a great option if you do not expect to own the home more than a few years, if you plan to sell before your rate expires for instance. Just be cautious as the economy or housing market may make selling a challenge.

Eliminate Mortgage Insurance

Nearly half of home loans have some form of mortgage insurance added to the monthly payment. Mortgage insurance protects the lender if the borrower defaults on the loan. The cost of mortgage insurance ranges from 1 to 2 percent of the loan amount. FHA loans require mortgage insurance, see below, and the only way to eliminate it is to qualify for a more conventional mortgage. USDA loans have funding fees that serve as a type of mortgage insurance.

FHA Loan

An FHA loan includes a mortgage insurance premium. For example, on a $200,000 home with 3.5 percent down, FHA would charge an insurance premium of 1.75 percent of the total loan amount, or $3,377. This would make your loan amount $203,377. In addition, you pay monthly mortgage insurance. This would add about $140 to your monthly mortgage payment.

USDA Loan

There is a 1 percent fee for the USDA loan called a guarantee fee. The guarantee fee is 1 percent of the purchase price. You can choose to pay this fee in cash, or you can add the fee to your loan amount. Each year, USDA adds a guarantee fee of .35 percent to your monthly payment.

For example, if you need to borrow  $150,000, you have a one-time guarantee fee of $1,500. Your total loan amount is now $151,500. In the first year, the annual guarantee fee will add $43.75 to your monthly payment unless you choose to pay it in cash.

VA Loan

Switching to a VA loan is the best option if you believe you or your co-borrower may now be eligible. Check to see if you can obtain a Certificate of Eligibility.

  • Active-duty service members who have served for 90 continuous days are eligible.
  • Veterans are eligible based on when they served.
  • National Guard members are eligible based on when they served.
  • Reserve members are eligible based on when they served.

For more information on your eligibility, visit https://www.va.gov/housing-assistance/home-loans/eligibility/

The Three NOs!!!

Do not quit your job or change jobs until you have a mortgage.
Do not apply for new credit. It can lower your credit score.
Do not make large purchases until you have a mortgage.

Closing Costs

You want to refinance when you are in the home long enough for the savings to cover your closing costs. If you have to pay $2,000 in closing costs to refinance for monthly savings of $100, then the first 20 months of savings go to the lender. You can roll your closing costs into the refinance amount, but you will be paying interest on the additional loan amount.

Closing costs to refinance are similar to the costs to close a purchase mortgage. You are taking out a new mortgage to replace an old one, so expect similar costs.