The type of mortgage loan you select will depend on how long you expect to continue living in your current home, your reasons for refinancing, and the amount of the monthly payment you can comfortably afford. To compare fixed-rate and adjustable-rate mortgages, see the bellow sections.

Fixed-Rate Mortgages
When interest rates decline, some homeowners choose to refinance from an adjustable-rate mortgage to a fixed-rate mortgage or to convert a longer term fixed-rate loan to one with a shorter term. If you expect to remain in your home for several years, you may want a fixed-rate mortgage that will ensure that your interest rate will remain the same for as long as you have your loan. If you decide that you like the stable, predictable payments of a fixed-rate loan, then you must choose from a variety of payment terms - 15 and 30 years are the most common. Although the amount of your monthly payment may increase with a shorter term loan, you will reduce the interest you owe on the loan, while building up the equity faster.

Adjustable-Rate Mortgages
Homeowners refinance with adjustable-rate mortgages (ARMs) for many reasons. During times when interest rates are higher, homeowners may trade in a higher fixed-rate mortgage for a lower rate ARM. Because the index values fluctuate, homeowners may also change from one type of ARM to another or refinance with the same type of ARM to get a lower rate. Arms feature an interest rate that moves up and down as market conditions change. Although an ARM usually offers a lower initial rate, your mortgage payments will change periodically (usually once or twice a year). Interest rate changes typically are subject to a limit or “cap” for each adjustment and for the life of the loan. A typical ARM that adjusts annually may have a per-adjustment cap of 2 percent and a lifetime cap of 5 percent. For example, if your mortgage starts at 6 percent, it could increase to 8 percent after one year. Over time, however, it would not be higher than 11 percent because of the 5 percent lifetime cap.

When considering refinancing with an ARM, it is important to understand how often your mortgage will adjust and how much your payment can change with each adjustment and over the life of your loan.

If you are considering refinancing your mortgage loan, this section can help. For reasons to refinance, click on Is Now a Good Time to Refinance? If you want to understand what's involved in the process, the costs and fees you'll have to pay, and how long it will take you to recover those costs, click on What is the Refinance Process?   Finally, for information that will help you compare loan terms among lenders, click on Shopping for Your Best Mortgage Deal.