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 several factors:
- Interest rates
- How does your current rate compare with those currently available?
- Type of mortgage
- Does your mortgage type (fixed or adjustable rate) fit your plans
on how long you intend to live in your current home?
- Monthly payments
- Can you reduce your payments by refinancing or can you afford more?
- Loan balance -
If you have paid down your mortgage over time, refinancing the lower
balance may reduce your payments even with the same interest rate. Do
you wish to refinance with a higher balance to access equity you have
built up to pay down other loans or for other purposes?
- Costs of refinancing
- You may incur expenses when you refinance. If refinancing with lower
monthly payments is your objective, you should be sure that your monthly
savings over a short period of time will offset any refinancing costs
you may have.
- Tax consequences
- Interest paid on a home mortgage is usually tax deductible for those
that itemize their deductions. Consult your tax advisor for more information.
Here is a calculator
that will help you determine monthly payment levels with different types
As you look at these
results, there are be a few things that you will probably notice:
- Even though the
interest rates on shorter term fixed rate mortgages may be lower, the
monthly payments are probably higher. This is because the amount of
principal payment each month is larger. You are paying down the mortgage
- Usually, Arms with
shorter term initial rate periods (for example, 1 and 3 years) usually
have lower rates and lower monthly payments. This is due to the "yield
curve" sloping upward with longer maturities. Longer term loans
have higher rates.
Even though shorter
term Arms and potentially balloon mortgages offer lower monthly payments,
it is important that to understand that rates on Arms can increase after
the initial period and that the entire balance of a balloon mortgage comes
due at the end of the mortgage period. If you are considering an ARM or
balloon mortgage, be sure that you would be able to afford a higher monthly
mortgage payment if your rate increases. Here is a calculator that can
help you evaluate the impact of increasing mortgage rates.
Other Issues to
- The size of your
mortgage payment should only be one part of your mortgage decision making
- If "paying
off" your mortgage or significantly reducing your total debt level
is important, a shorter term fixed rate mortgage with a 20 or 15 year
term may be right for you.
- If you plan to
live in your home for only a short time (for example, five years or
less), you may want to seriously consider an adjustable rate mortgage
with an initial rate term that matches your moving plans.
- Balloon mortgages
are usually less attractive than a similar term ARM. With a balloon
mortgage, you will need to secure a new mortgage at the end of the term
subjecting you to not only to changes in rates, but also the costs and
process of getting that new mortgage.
- Be sure that you
can afford your mortgage payments - both at the time you get it and
in the event that you get an ARM and rates have risen when the initial
rate period expires.
Choosing the mortgage
that is right for you is critical. Consider what you want your mortgage
to do for you. Factor in your plans for how long you anticipate needing
the mortgage (how long you are going to live in the home) and be sure
that you can accept the risk that your monthly payments may rise if you
choose an adjustable rate or balloon mortgage.
Control of Your Financial Future
Articles from our
library about buying and owning a home.
implications of home ownership
refinancing regardless of rates
your first home
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