Home Buying & Refinancing
Why You Should Consider Refinancing Regardless of Rates
February 29, 2016
If you are like most people, your home is your most valuable financial asset. Periodically examining your existing mortgage and potential mortgage options is a smart move.
As part of this review, be sure to include four factors – interest rate, type of mortgage, your plans and tax consequences.
Consider interest rates
Even though mortgage rates have increased since the record lows of 2003, they are still very low compared to historical norms. If you did not refinance, or get your original mortgage, during the last period of low rates, be sure to compare your current rate with the current rates.
Consider mortgage types
Interest rates charged on mortgages vary greatly depending on the type of mortgage. Fixed rate mortgages offer the benefit of locking in a rate and knowing exactly what your payments will be for the term of the mortgage. Generally the longer the term, the higher the rate. For example, the rate on a 30-year mortgage might be 4.75% compared to only 3.75% for a 15-year mortgage. For a mortgage of $100,000, the difference in total interest payments over the life of the mortgage is over $56,000.
Adjustable rate mortgages usually offer lower rates, but the rate may be revised periodically. Usually, ARMs with shorter initial rate terms offer lower interest rates than those with longer initial interest rate terms. A 1-year ARM might have a 2.50% rate compared with 3.25% for a 10 year ARM.
Consider your plans
When reviewing your mortgage options, be sure to factor in how long you intend to keep your home as well as your ability to handle potentially higher rates in the future with ARMs. If you plan to downsize and move to a smaller home in a few years, a 5-year ARM would provide a much lower interest rate than a traditional 15 or 30 year fixed rate mortgage. You owe it to yourself to “run the numbers” and determine if refinancing with a different type of mortgage makes sense for you. There are many “mortgage calculators” available on the Internet to assist in your analysis.
Consider the tax benefits
If you itemize your tax deductions, the interest you pay on you mortgage or a home equity loan may be deductible. Refinancing your mortgage and taking cash out or borrowing through a home equity loan or a second mortgage may provide the money to pay off higher rate loans, such as credit cards or auto loans, and provide a tax deduction as well.
Do not let today’s opportunity pass!
No one knows whether interest rates are going up or down in the future. However, you should know that today’s interest rates are low compared to rates of a few years ago, but have started increasing. Be sure to examine your mortgage in light of today’s rates and with a view towards making sure your mortgage matches your plans.