Should I Refinance My Home Mortgage?

Financial Resources

The changing interest rate environment has enabled many homeowners to reduce their monthly mortgage payments by hundreds of dollars. For others it has prompted them to consider a different type of mortgage to match their lifestyle. Is refinancing right for you?

Housing costs are one of the largest components of most household budgets. With interest rates changing so frequently, you should periodically determine whether refinancing at current interest rates would save you money.

To determine whether you should consider refinancing you need to compare the costs of obtaining a new mortgage with the savings you will enjoy with a reduced interest rate. You my also want to consider refinancing to a different type of mortgage, such as switching from a 5 year balloon to a 15 year fixed rate mortgage.

For example, Rick and Carol have a home they bought 3 years ago for $300,000 and they have 5 years remaining on balloon mortgage of $200,000 with an interest rate of 6.25%. Their monthly payments are $1231.43. They intend to live in their home for several years and would like to lock in a 30-year mortgage with a 4.375% fixed rate.

In this example, Rick and Carol would save almost $2800 annually in mortgage payments and lock in a 30 year fixed rate mortgage. Over the course of the mortgage they would pay about $83,000 less in total interest.

We have mortgage refinancing calculators that can make the calculation easier. Many sites include calculators to determine monthly payments for any size mortgage with any interest rate.

Other Considerations
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.

Final Thoughts
No interest rate environment lasts forever. Unfortunately, there is no crystal ball that will tell you when rates have reached their lowest level. 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.

Financial articles provided by WestStar Bank are for information purposes only and are not to be construed as tax or investment advice. Please consult with a tax and/or investment professional if you have any questions or doubts about any of the information contained in the articles.

Products: Personal Loans

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