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Refinancing your mortgage sounds complicated, but it’s quite simple: you start a new loan, your new lender pays off your previous loan, and you now pay the new lender. The purpose of refinancing is usually to take advantage of low interest rates, which is something that millions of Americans are doing right now.
30 Year Fixed-Rate Mortgages
As the name suggests, this type of loan gives the borrower 30 years to pay off the amount. Rates for this type of loan have dropped almost 25% on average. 30-year fixed mortgage rates went from 3.56% a year ago down to 2.86% in September.
15-Year Fixed-Rate Mortgages
A 15 year fixed rate mortgage is just like the 30 year, however, the borrower pays a lower interest rate because the pay off time is cut in half. On average, interest rates for this type of loan dropped from over 3% down to 2.4% - a substantial decrease that can save upwards of $50,000 over the life of a 300k mortgage.
This type of loan is a little more complicated as the rate fluctuates (ARM stands for adjustable rate mortgage). The 5/1 denotes a loan that is the same for the first 5 years and then the rate switches to a variable rate that rises and falls with the market. Typically the 5/1 is a lower rate for the first 5 years and thus a strong option for buyers who plan to sell within that time period.