Types of Mortgage Refinance Loans
Technically, you can take out any kind of loan and use your loan proceeds to pay off your mortgage. Viewed this way, any type of loan can be a mortgage refinance loan. However, some have restrictions (i.e. some loans do not offer a big enough credit for paying off a mortgage) so they don’t make good refinance loans.
This article is about the loans you can use for refinancing your mortgage. Since these are loans that banks have specifically designed for paying off mortgages, they are also known as the common types of mortgage refinance loans that are available in the market.
According to Variability of Interest Rate
Fixed-rate mortgage refinance loan: This type of home refinance loan is one where the interest rate is locked-in to a fixed amount for the whole duration of the loan. Simply put, the home refinance loan will be kept at a constant interest rate for the whole life of the balance.
Variable-rate mortgage refinance loan: This type of home refinance loan is one where the interest rate varies with a certain, predetermined index. The interest rate, in this case can be equivalent to the index or greater than the index by a fixed margin. In this type of mortgage refinance loan, there is usually an introductory rate period where the interest rate is fixed for a few years (3 and 5 years are common) at a very low rate. After this introductory period has passed, the rate becomes a true variable rate – subject to the whims of the market. However, there’s usually a cap or interest rate ceiling to protect the consumers from excessive index rate increases.
According to Payment Terms
Interest-only mortgage refinance loan: This type of mortgage refinance is one where you will be asked to pay only the interest for a certain period of time. After the set interest-only payment period has passed, you will have to start making payments towards the principal.
Balloon-type mortgage refinance loan: This type of refinance loan is one with an initially low, fixed interest rate (the actual period varies from lender to lender but this period doesn’t usually exceed 10 years). After the period for the low interest has passed, however, full payment is required on loan balance.
Fully-amortizing mortgage refinance loan: This type of refinancing loan is one where monthly payments are a combination of interest charges and payments towards the balance. This type of loan is ideal for people who wish to add to their equity as well as reduce the balance with every payment.
Home equity mortgage refinance loan: This type of loan is one where you actually apply for a loan using the equity you have stored in your home as your security for the loan. In this case, you give up your equity for money which you can get as outright cash or as a revolving credit line. Such a loan usually has a very good interest rate. However, this type of loan is ideal for mortgage refinancing ONLY if you have enough equity in your home to pay off your original mortgage lender. This can happen if your home has appreciated considerably. If you don’t have enough equity to pay off your original lender, you will only be taking on a second mortgage, not a refinancing loan.