Mortgage Refinancing Tips
If you are like most people, your home is your most valuable financial asset and your mortgage is your largest debt. Consequently, periodically examining your existing mortgage and potential mortgage options makes sense. 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 mortgage rate with today’s available mortgage rates, you may still find plenty of opportunity for savings.
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 initially, 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. For example, 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 may 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 or term of mortgage makes sense for you.
Consider Other Options
When reviewing the feasibility of refinancing, you may also wish to consider refinancing a larger or smaller amount than the current balance of your mortgage. If you have excess funds available and believe you will have a hard time earning a return greater than the mortgage rate, you may want to pay down your mortgage and get a new mortgage that is smaller. If you have other liquidity needs, you may want to refinance a larger amount to free up some of the equity in your home.
Remember that mortgage interest is tax deductible if you itemize your deductions on your tax return. Consult your tax advisor to see how this may apply to your situation.
Don’t Let Opportunity Pass
After reviewing your situation, if you do decide mortgage refinancing is right for you, don't let today's low rate environment pass you by. No rate environment lasts forever, and unfortunately there is no crystal ball that will tell you when rates have reached their lowest level. Be sure to examine your mortgage in light of today’s rates and with a view towards making sure your mortgage matches your plans. Taking action now to evaluate whether refinancing now makes economic sense, and evaluating the type of mortgage you want can help you be in control of one of your largest household expenses.
Call us to find out today’s mortgage rates or to schedule a free, no-obligation consultation with any of our mortgage lenders. We will be happy to help you figure out if refinancing is right for you.
For additional tips on mortgage refinancing, you may also refer to the Federal Reserve’s A Consumer’s Guide to Mortgage Refinancings.