Should You Refinance Your Home Mortgage?

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 lower interest rate. You may 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.

Here’s an example along with a worksheet to help you decide if refinancing makes sense for you. Feel free to print this article and use the worksheets. Rick and Carol bought a home three years ago for $300,000. They have five years left on a balloon mortgage of $200,000 at an interest rate of 7.5%. Their monthly payments are $1,967. They plan to live in their home for several more years and want to lock in a 30-year mortgage with a fixed rate of 6.5%.

In this example, Rick and Carol would save nearly $1,608 annually on mortgage payments and secure a 30-year fixed-rate mortgage. Over the duration of the loan, they would pay approximately $48,240 less in total interest.

Many websites offer mortgage refinancing calculators that simplify the process. Numerous sites include tools to determine monthly payments for any mortgage size and interest rate.

Other considerations

When evaluating the feasibility of refinancing, you might also consider refinancing a different amount than your current mortgage balance. If you have extra funds and doubt that you’ll earn a return higher than your mortgage rate, you might want to pay down your mortgage and refinance for a smaller amount. Conversely, if you have other liquidity needs, refinancing a larger sum could help you unlock some of your home’s equity.

Remember that mortgage interest is tax deductible if you itemize your deductions on your tax return. Consult your tax advisor to see how this might apply to your situation.

Final thoughts

Interest rate environments don’t last forever. Unfortunately, there’s no crystal ball to tell you when rates hit their lowest point. Taking action now to assess whether refinancing makes economic sense, and deciding on the type of mortgage you want, can help you stay in control of one of your biggest household expenses.