To decrease your overall payment and interest rate, it may make sense to pay a point or two, if you plan on living in your home for the next several years. The cost of the mortgage financing will be paid for by the monthly savings gained. If you are planning on moving to a new home soon, you may not be in the home long enough to recover the closing costs associated with the transaction. Therefore, it is important to calculate a break-even point, which will help determine whether the refinance is a sensible option. Borrowers who are willing to risk an upward market adjustment can consider an Adjustable Rate Mortgage (ARM), which can provide a lower monthly payment initially, but are susceptible to increases with the market. They are also ideal for those who do not plan to own their home for more than a few years. Borrowers who plan to make their home permanent may want to switch from an adjustable rate to a 30 year or 15-year fixed rate mortgage. Most borrowers take comfort in knowing exactly what their monthly payment will be every month, for the duration of their loan term.

FHA mortgages also use mortgage insurance to protect lenders from borrower payment default. This insurance is called the Mortgage Insurance Premium (MIP), which is paid in the monthly mortgage payment, like PMI. The big difference between MIP and PMI is that MIP never drops off and is paid for the entire loan term. FHA mortgages never have a prepayment penalty, so borrowers can refinance to a Conventional Mortgage anytime. Guidelines for FHA mortgages are less strict than for Conventional Mortgages, hence the never-ending MIP.

Low down payment options allow borrowers to purchase homes with less than 20% down payment. However, they usually require Private Mortgage Insurance. PMI is a monthly payment included in the mortgage payment to protect lenders in the event of borrower payment default. For Conventional mortgage loans, the PMI will eventually drop off when the property reaches a certain loan to value (typically 78%).

Balloon programs, like ARMs are a good option for lowering initial monthly payments. However, at the end of the fixed rate term, the entire mortgage balance will be due. Check your Balloon Note terms for any prepayment penalties to determine the proper time to refinance to a new fixed rate or adjustable rate mortgage.

Some common uses for tapping into your home equity include purchasing investment property, divorcing couple/partner buyout, paying children’s education, home improvements, paying off credit cards, starting a business, or consolidating a home equity line of credit (HELOC). The 2017 tax bill changed how HELOCs and home equity loans are treated to where they are no longer tax deductible unless the debt is obtained to build or substantially improve the homeowner’s dwelling (through 2026). Interest paid on a traditional first mortgage loan is tax deductible up to a $750,000 loan balance.