Things to Consider When Refinancing

Millions of homeowners refinance their mortgage every year.  It is important to fully understand the process and costs involved.  There are many reasons to consider refinancing your mortgage.  Some of these reasons are:

• lowering payments by reducing the interest rate and/or eliminating mortgage insurance
• shortening the loan term to gain equity at a faster rate
• utilize equity for things such as debt consolidation, higher education, home improvement, or a major purchase

Several things should be carefully considered before making a final decision to refinance.  These include:

• your long term financial goals
• the interest rate of your current mortgage
• the closing costs associated with refinancing
• how long you plan to remain in your home
• how much equity you currently have in your home
• your current job and/or income status
• your current credit status

What does it cost to refinance?  What are the benefits?

Have you ever heard the old rule of thumb that you should only refinance if your new interest rate is at least two points lower?  That may have been true years ago, but with refinancing dropping in cost over the last few years, it's never the wrong time to think about a new loan!  Refinancing has a number of benefits that often make it worth the up-front expenditure many times over.  When you refinance, you are paying for most of the same things you paid for when you obtained your original mortgage.  The costs may include settlement costs and other fees, an appraisal, lender's title insurance, underwriting fees, and so on. Depending on the terms of your original mortgage, you might also have to pay a penalty if you refinance too soon.  These pre-payment penalties are illegal in some places, and more often than not, only apply for the first few years of your mortgage.

You may pay points to get a more favorable interest rate.  If you pay (on average) three percent of the loan amount up front, your savings for the life of the new mortgage can be significant.  You should be aware that the IRS has recently said that points paid for the purpose of refinancing your mortgage cannot be deducted in their entirety in the year you pay them - unless the refinanced loan is primarily for home improvements.  Consult your tax professional before deducting points you pay on your new mortgage from your federal taxes.

Speaking of taxes, if you lower your interest rate, you will naturally be lowering the amount of mortgage interest payments you can deduct from your federal income taxes.  This is another cost that some borrowers consider. 

Ultimately for most people, the amount of up-front costs to refinance are made up very quickly in monthly savings.  I will work with you to determine what program is best for you by considering your cash on hand, your overall financial goals, how likely you are to sell your home in the near future, and what effect refinancing might have on your taxes.