Mortgage Basics

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Another reason you might consider refinancing is to change the length of your mortgage. Many people refinance a 30-year mortgage to get a 15-year mortgage as their financial situation changes.

Or if you have a fixed-rate mortgage, you may be interested in refinancing to get an adjustable-rate loan with a lower interest rate.

Fixed-rate mortgages usually carry higher rates than adjustable-rate loans. They make sense for homeowners who plan on holding a mortgage for a longer term (at least seven years), and who don't like the rate fluctuations that occur with an adjustable mortgage.

When interest rates drop, as they've been doing recently, many borrowers rush to dump their adjustable-rate loans for the certainty of fixed-rate mortgages. If you expect to move or refinance over the next five to seven years, however, an adjustable-rate mortgage probably will result in fewer costs.

There also is a type of mortgage known as a two-step, or hybrid adjustable loan. This has a fixed rate during the first three, five, seven, or ten years (depending on your agreement), and then converts to a standard adjustable or fixed mortgage. These loans offer the comfort of a fixed-rate loan during the initial period and have a lower rate than the average 30-year fixed rate.

There are many types of mortgages available, as discussed further in Deciding How You'll Pay for Your Home. If you're interested in refinancing to get a better rate, a different type of mortgage, or to change the length of your loan, keep the following tips in mind.

• Don't get a loan with a repayment penalty. This provision typically charges you a fee if you repay more than 20 percent of your loan during the first 5 years.

• Get the lock-in in writing. Some lenders will lock the interest rate on the mortgage for a fee. Some lock-ins allow borrowers to benefit from a drop in interest rates while protecting them from increases.

• Shop around. Compare the fees and terms of at least four lenders. Look at the rates and the total cost of refinancing from each lender.

• Don't allow every potential lender to run a credit check on you. You can't blame potential lenders for wanting to be sure that you're credit worthy, but repeated requests for credit reports can send up red flags at the credit agency and actually lower your credit score. Allow the first lender you contact to run a credit report on the condition that you receive a copy. Provide the report to other lenders as you shop around.

Many mortgage refinancing companies are replacing 30-year loans with 15-year mortgages. A shorter-term mortgage usually offers slightly lower interest rates, which will save a lot of interest over the life of the loan. This means, however, that your monthly payments will be a little higher. Shorter-term loans are a good idea for people who want to pay off their mortgage in time for retirement.

Biweekly mortgage payments allow you to make 26 mortgage payments a year, which is equal to 13 monthly payments instead of the usual 12. This is a disciplined approach to paying off your mortgage early. Ask your lender about the possibility of changing a monthly mortgage to a biweekly schedule. There may be a minimal fee, but the extra payment every year will make a difference.

As you can see, there are many factors to think about if you're considering refinancing your mortgage. It's a good idea to meet with a representative of a lending company for more information if you're thinking about changing the terms of your current loan.