Current Loan Refinance Loan Amount $97,960 (originally borrowed $100,000) $99,960 ($97,960 + $2000) Closing Costs Rolled into Principal Balance n/a $2000 Rate 9.5% 8% Years Left to Pay 27 30 Principal/Interest Payment $841 ($65 + $776) $733 ($67 + $666) Monthly Equity Building $65 $67 Monthly Increased Equity n/a $2 ($67 - 65 ) Break-even Estimate n/a 18.35 months ($2000 cost divided by $109 in monthly savings)

NOTE: These sample loans are for illustration purposes only and are not a rate quote, pre-approval, or commitment to lend.

In this example, it makes sense to refinance because you break even in less than 19 months, comparing monthly payments and principal payment based on the amortization schedules. In other words, the savings you achieve in the proposed refinance offset the closing costs in less than 2 years.

Think you might stay in your home for another 5 or 7 years? The loan to consider here might be a fixed period Adjustable Rate Mortgage (ARM) that starts with a fixed rate and converts to an ARM at the end of the 5 or 7 years. Since you won't be in the home at that point, you'll be out of the loan by then. And you'll have saved a considerable amount on your monthly payments and interest.

With so many ways to lower your monthly payment, how do you pick the right one for your situation? Call us right now at 1.800.901.9479 for some free advice. Or try our Refinance Calculator.

NOTE: Relative benefits of the alternatives described above will vary over time and depend on individual circumstances.

Refinancing for the stability of a fixed rate loan
An adjustable rate mortgage is a great way to get into a home with low starting monthly payments. But the periodic rate adjustments and possibility of rate hikes can be disconcerting. Which is why you might want to consider switching to the stability of a fixed rate loan.

Here again, you have different options for every situation.

Plan to be in your home just for a set number of years? You can get fixed period ARMs that start with fixed rates (from 5, 7 or 10 years for the initial fixed rate term), then the rate adjusts yearly after that. If you stick to your plan, by the time the loan would have converted to an ARM, you'll have already moved. A tip: the shorter the initial fixed rate period, the lower your interest rate typically is.

If you're planning to be in the home for a long time, consider a fixed rate loan with a term of 15, 20, 25 or 30 years. Just remember, fixed rate loans may have a higher rate than what you're currently paying for your ARM (Rates may change daily, be sure to compare current fixed rates). So you want to carefully consider both how long you plan to stay in your home and how important the stability of a fixed rate loan is to you.

Refinancing to access home equity
The home loan payment you make each month increases the equity you have in your home. This equity can represent a substantial part of your savings. By refinancing, you can free up some of this money for other purposes. You might need it for a child's college tuition. Or to invest in a second home.

Another good reason to take cash out of your home is to pay off debts that have non-deductible interest costs. The interest on home loans is, in most cases, tax-deductible. If you have a sizeable amount of debt in non-deductible loans, such as credit cards and car loans, it can make sense to use some of the equity in your home (provided you have enough) to pay off these debts. That way, the interest you pay on your combined debts is now tax-deductible. (See your tax advisor about your particular situation.)

To draw out cash from your home, you can typically borrow up to 75% of the appraised value. At Bank of America, we have an expanded cash-out program that allows you to borrow up to 90% of the appraised value of your home.

Refinancing to eliminate mortgage insurance
Did you purchase your home with less than 20% down? Then you probably have a monthly mortgage insurance payment along with your principal and interest. (Check your home loan statement if you're not sure.)

As you build equity in your home, you eventually reach the point where you have more than 20% equity. You may already be there. In fact, in a favorable housing market where home values are increasing at above average rates, your home's worth may have increased to the point where you have 20% equity simply because your home has become more valuable. But you may not be able to cancel your mortgage insurance yet.

Your goal for this kind of refinance should be to get a loan without monthly mortgage insurance that has a rate as low or an even lower than your current loan. The ideal situation would be to reduce your rate by more than just the cost of your monthly mortgage insurance payment alone.

NOTE: Home equity loans not available in some states.