Four Factors to Consider When Refinancing

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.

Are interest rates higher or lower?

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. 

Is it a fixed or variable-rate mortgage?

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.

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. 

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 may provide a 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. 

The interest you pay on your mortgage may be tax 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.