Today's financial landscape is far different than when you financed your home years ago. The financial environment at the time you purchased your home determined the interest rates, which may be higher than today's prevailing rates. Further, your own personal financial circumstances have probably changed.
Is your current mortgage working in your favor? These simple questions may help you decide if it's time to refinance.
Refinancing means you apply for a new mortgage loan with more favorable terms and use it to pay off your original mortgage loan.
When Refinancing Makes Sense
To: Lower your monthly payment
Do This: Secure a lower interest rate and/or lengthen the term of your mortgage
Refinancing may provide a lower interest rate, which in turn may lower your monthly payment. Remember that is important to examine carefully the amount you save on interest vs. the amount of refinancing fees you may pay. Calculate how many years will it take you to pay back the refinancing fees or ask your mortgage lending officer to provide this information. A longer term will probably lower your payment amount, but your overall outlay will increase because of the greater interest cost.
To: Save money long term
Do This: Shorten the length of your mortgage
Paying off your mortgage in less time can save you money. Because you pay off the loan quicker, you pay less interest on the amount borrowed. For example, you've paid 10 years on your original 30-year mortgage. By refinancing to a 15 or 10-year mortgage you will avoid paying interest for those extra years. Be aware that you may be required to pay a higher monthly payment. If you plan to live in the home for this time and beyond then this arrangement can be very advantageous.
To: Build equity quicker
Do This: Lower the interest rate but keep same payment
Would you like to build up equity in your home quicker? If the refinanced interest rate is lower, try to keep the same monthly payment. By doing this, a larger amount of your payment will be applied to reduce the outstanding principal balance, increasing your equity (the difference between your home's value and your mortgage balance).
To: Keep consistent payment amounts
Do This: Use a fixed-interest mortgage rather than adjustable-rate mortgage (ARM)
The present financial conditions may mean interest rates are fluctuating too much for ARM loans (adjustable rate mortgage), which could put a strain on your budget. Consider a fixed-interest mortgage to provide more stability.
To: Obtain extra cash for large one-time purchases or pay off high interest credit card debt
Do This: Refinance for a higher amount than your current principal balance
If you've built up equity in your home you may qualify for "cash-out" refinancing. This means you refinance the mortgage loan for an amount higher than your current principal balance. The "extra" amount is available as cash for college expenses, paying off high-interest credit card debt, or remodeling your home.
Remember: you will pay interest on the "cash-out" amount over the entire term of the mortgage. Do the math! Be sure you are not paying more interest over the long-term than if you borrowed the money short-term at a higher interest rate.
About Taxes: Advantages
Mortgage interest, in general terms, is fully tax deductible but there are some simple rules. By law the IRS recognizes two types of mortgage debt: home acquisition debt and home equity debt.
Home acquisition debt is debt acquired to purchase the house. During the first years of your mortgage you accrue more payment towards the loan interest, and thus receive a higher tax deduction than in later years. If you refinance your mortgage, the amount of the new loan also qualifies as home acquisition debt.
TIP! The IRS has special rules regarding tax deductions for your main home versus a second home so check with your financial advisor regarding these regulations.
Home equity debt comes into play if you refinance "over" the amount of the home acquisition debt for reasons other than to buy, build, or substantially improve your home. This may also be referred to as "cash-out" refinancing.
For example, you refinance $5000 more than the needed $150,000 mortgage loan (home acquisition debt) to obtain cash to pay off credit card debt. This $5000 is considered home equity debt.
Interest paid on the first $100,000 of home equity debt is considered tax deductible. Interest on credit card debt is not tax deductible.
Get the Details On Home Mortgage Interest Deduction
Search the Publication 936
www.irs.gov
or ask your tax professional.
Closing Costs
There are a number of closing costs associated with mortgages and some are within your lender's control and others are dictated by the going market price of vendors in your area. The following are the most common closing costs:
- Application Fee (lender controls)
- Loan Origination Fee (lender controls)
- Discount Points (lender controls)
- Appraisal Fee (market price)
- Title Search Fee (market price)
- Title Insurance Fee (market price)
- Prepayment Penalty on Existing Mortgage (original lender)
Not all mortgage lenders are the same! Some mortgage brokers have much higher fees than other mortgage lenders. Be sure to comparison shop by checking the fees between a mortgage broker and at least one community bank in your area.
IMPORTANT: You should receive a Good Faith Estimate of closing costs from each of the potential lenders before you decide which lender to use.
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