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.
Even though mortgage rates have increased since the record lows of 2003, they are still very low compared to historical norms. If you did not refinance or get your original mortgage during the last period of low rates, be sure to compare your rate with rates currently being offered.
Interest rates charged on mortgages vary greatly depending on the type of mortgage. With fixed-rate mortgages, you lock in a rate and know exactly what your payment will be for the term of the mortgage. Generally the longer the term, the higher the rate will be. For example, the rate on a 30-year mortgage might be 6.25 percent compared to only 5.5 percent for a 15-year mortgage. For a mortgage of $250,000, the difference in total interest payments over the life of the mortgage is more than $186,000.
Adjustable rate mortgages (ARMs) 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. A one-year ARM might have a 4 percent rate compared with 4.75 percent for a five-year ARM.
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 five-year ARM would provide a much 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. BB&T has several mortgage calculators that can assist in your analysis.
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. Doing so could also provide a tax deduction.
No one knows whether interest rates are going up or down in the future. However, you should know that today’s interest rates are low compared to rates of a few years ago. Be sure to examine your mortgage in light of today’s rates and with a view towards making sure your mortgage matches your plans.