Consider Refinancing Regardless of Rates

Addressing the issue from four points of view.

If you are like most people, your home is likely your most valuable financial asset, and your mortgage is probably your largest debt. Therefore, it makes sense to periodically review both your current mortgage and potential options. As part of this review, be sure to consider four key factors – interest rate, type of mortgage, your plans, and tax implications.

Consider interest rates

Although mortgage rates have risen since the record lows of 2020, they remain very low compared to historical norms. If you did not refinance or obtain your original mortgage during the last period of low rates, make sure to compare your current rate with the current rates.

Consider mortgage types

Interest rates on mortgages vary widely depending on the type of mortgage. Fixed-rate mortgages provide the advantage of locking in a rate and knowing exactly what your payments will be for the duration of the loan. Generally, the longer the term, the higher the rate. For example, the rate on a 30-year mortgage might be 6.75%, compared to only 5.75% for a 15-year mortgage. For a $100,000 mortgage, the difference in total interest payments over the life of the loan exceeds $56,000.

Adjustable-rate mortgages generally offer lower initial rates, but the rate can be adjusted periodically. Typically, ARMs with shorter initial rate periods have lower interest rates than those with longer initial periods. For example, a 1-year ARM might have a 2.50% rate compared to 3.25% for a 10-year ARM.

Consider your plans

When reviewing your mortgage options, be sure to consider how long you plan to stay in your home and your ability to handle potentially higher rates in the future with ARMs. If you expect to downsize and move to a smaller home in a few years, a 5-year ARM could offer a significantly lower interest rate than a traditional 15- or 30-year fixed-rate mortgage. It's important to “run the numbers” and see if refinancing with a different type of mortgage makes sense for you. Many online mortgage calculators are available to help with your analysis.

Consider the tax benefits

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-interest loans, such as credit cards or auto loans, and also offer a tax deduction.

Do not let today’s opportunity pass

No one knows whether interest rates will go up or down in the future. However, you should know that today’s interest rates are low compared to a few years ago, but they have started rising. Be sure to review your mortgage in light of current rates and ensure that it aligns with your plans.