Is Rate the Only Consideration?

There are four factors in the decision to refinance.
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.

Interest rates -- are they higher or lower?

Even though mortgage rates have increased, they are still very low compared to historical norms. If current rates are lower than the rate on your mortgage, you may have an opportunity to save. Be sure to compare your interest savings against what it will cost to refinance

Mortgage types -- fixed or variable?

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 more than $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.  

Plans -- what is your financial situation and how long do you intend to keep your home?

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. 

Tax benefits  -- the interest you pay on your mortgage may be deductible.

If you itemize your tax deductions, the interest you pay on your 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.

No one knows for certain whether interest rates will go up or down in the future. Be sure to examine your mortgage in light of today’s rates and make sure your mortgage matches your plans.

Refinance Savings 

Can refinancing lower my payment?

How Much Interest Will I Pay?

Consider all the factors.