Deciding on the type of home equity is a complex and confusing decision. Even when a person has decided to go for refinancing home mortgage, it is not the end of complexities. He still needs to find the loan type best suiting his needs among the hundreds of loan products. A person will be able to reap greater benefits when he chooses a plan that complies with his requirements. Refinancing mortgage not only gives the advantage of lower interest rates but also provides monthly savings and avoids foreclosures.

The most common types of refinance loans are–

• Fixed Interest Rate Mortgage – It is the most secure of the various loan types as the interest rates are fixed throughout the credit period. Hence any increase in the market interests does not affect the rate of loan. It makes budgeting and monthly planning simpler as the person does know that monthly installment won’t change. The rate of interest initially is higher than the Adjusted Rate Mortgage.

• Adjustable Interest Rate Mortgage – In Adjusted Rate Mortgage, also known as ARM, the interest rates change with the market fluctuations. The people who opt for ARM enjoy the benefits of low interest when the market is low while fixed rate mortgages have to pay the same high interests. Though the initial rate of interest is low, there is high risk of the interest rates increasing dramatically over the period of time. This makes ARM an unstable type of loan.

• Balloon Home Loan – Balloon home loans are generally not taken up by borrowers as it requires careful planning. In balloon home loans, the rate of interest is fixed for a certain period of time. Thus, there are small amount of payments for a fixed period of time (less than 10 years). At the end of this period, a massive final payment i.e. the full balance of loan becomes due. The initial rate of interest is as low as the adjustable rate interest but no refinancing can be done until the balloon payment is made.

• Cash Back Refinancing – In this type of refinancing, the borrower can use the cash that comes in hand for other purposes like children’s education etc. This loan is drawn on basis of equity of a person in the house. Equity is a measure of how much the person ‘owns’ the house and is the difference between market value of the house and balance of original loan owed. The person gets more cash than he actually owes on the house and can use the difference money somewhere else. The rate of interest is low and spread over a period of time which reduces the monthly payments.

• Short Finance – These are mainly taken to avoid foreclosures and can also be called as an alternative to sale or foreclosure. Here, the lender pays off the person’s original loan and replaces it with a new loan which has a reduced balance.

• Interest Only Refinance – In this type of loan, the borrower enters into an agreement with the lender to pay only interest for a specified period of time. At the end of that period, the borrower needs to start making regular payments (principal and interest both). It is useful for people who are facing financial turmoil and cannot make the regular payment giving them a financial break.

Refinancing can prove to be a miracle and save a person thousands of dollars or a disaster and cost the person his house. It totally depends on how smartly the person chooses the type of loan to suit his needs and financial situation.