Is Rate the Only Consideration?
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.
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.