Consider Refinancing Regardless of Rates

Addressing the issue from four points of view:

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

Consider interest rates

Even though mortgage rates have risen since the record lows of 2020, they remain relatively low compared to historical standards. If you didn’t refinance or get your original mortgage during the last period of low rates, be sure to compare your current rate with the current rates.

Consider mortgage types

Interest rates on mortgages vary significantly based on the mortgage type. Fixed-rate mortgages provide the advantage of locking in a rate, so you know exactly what your payments will be for the entire term. Generally, longer terms come with higher rates. For example, a 30-year mortgage might have a rate of 6.75%, compared to just 5.75% for a 15-year mortgage. For a $100,000 mortgage, the total interest paid over the life of the loan can differ by more than $56,000.

Adjustable-rate mortgages generally offer lower initial rates, but these rates can be adjusted periodically. Typically, ARMs with shorter initial rate periods offer 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 evaluating your mortgage options, be sure to consider how long you plan to keep your home as well as your ability to handle potentially higher rates in the future with ARMs. If you intend 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 worth running the numbers to see if refinancing with a different type of mortgage makes sense for you. Many mortgage calculators are available online to help with your analysis.

Consider the tax benefits

• Mortgage interest (on acquisition debt to buy, build, or substantially improve your home) is generally deductible up to $750,000 in total qualified debt ($375,000 if married filing separately) for loans after Dec. 15, 2017. Grandfathered rules allow up to $1 million for older debt.
• Home equity loan / HELOC / second mortgage interest is only deductible if the proceeds are used to buy, build, or substantially improve the home that secures the loan (treated as home acquisition debt). This has been the rule since 2018 under the Tax Cuts and Jobs Act (TCJA), and it applies through tax year 2025 (and likely 2026 unless legislation changes it).

Do not let today’s opportunity pass

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