Is It ReFi Time?
Millions of people are taking advantage of the current
opportunity to refinance the mortgage on their homes. Rising
home prices combined with falling interest rates have motivated
people to convert their accumulated home equity into expendable
funds. This frequently works to their immediate advantage,
giving them a considerably lower interest rate and lower monthly
mortgage payments.
Homeowners can choose either to spend or save the portion of
their incomes that are no longer being spent on mortgage
payments.
When Should You Refinance?
In some cases, when refinancing, it helps to borrow more than is
needed to pay off the earlier mortgage. This gives you the
equity from your home, plus extra funds to cover the transaction
costs of refinancing. People use the funds for a variety of
purposes: to make home improvements, to repay older debts, or to
buy goods, services or assets they couldn't otherwise afford.
How much can you save by refinancing? This depends on several
factors relating to your present mortgage situation. If your new
interest rate is low, it can result in substantial savings,
perhaps even thousands of dollars. And when rates rise, having
refinanced from a variable rate loan to a conventional loan, you
can stand to gain substantially.
Some Benefits Of Refinancing
Refinance a home mortgage is a big decision and should be
approached with careful consideration of the potential costs and
benefits. Clearly, when interest rates on mortgages fall below
the rate on your existing loan, it's time to consider
refinancing. This is the time to evaluate your potential
after-tax savings from lower monthly payments, and compare it
with the after-tax expenses of refinancing. These expenses
include mortgage fees or points, application fees and appraisal
fees. As the loan is repaid, the savings from your lower
interest payments begin to accumulate. The savings due to
refinancing must be discounted at the present rate and compared
with the transaction or closing costs. If you're considering
refinancing your home, you need to evaluate your current
interest rate. If your new interest rate would be more than 5/8%
lower than your current interest rate, it is well worth
refinancing. But if you want to keep your closing costs as low
as possible, see that your new interest rate is at least 1%
lower.
Why Refinance?
Most people who refinance do so to save money, but there are
other reasons to do so. If you refinance your existing loan at a
lower rate of interest, you can end up with a lower monthly
mortgage payment. This can save you funds in the long run.
Debt Consolidation
In many cases, you can clear all your outstanding debts and
replace them with just one low-cost monthly outlay. Refinancing
your home to consolidate your debts (such as a credit card
balance or a student loan) can save you money in the short run
and the long run, because you'll be paying on a low-interest
loan rather than a high-interest one.
Tax Advantages
If you have lower interest rates, it means smaller interest
deductions on Schedule A. You are allowed to deduct interest on
a debt of up to $1 million incurred to buy your primary
residence and one more home. Also deductible is the interest on
up to $100,000 of home equity loans for these two residences. If
you refinance a mortgage, the interest on this loan is
deductible to the limit of old mortgage plus $100,000.
The interest charges you pay up-front, or points, are really
interest that's pre-paid and must therefore be deducted
proportionately during the tenure unless you have purchased or
improved your existing principal property.
If you have bought investment real estate or a vacation home,
you can deduct points proportionately over the loan term. If you
have refinanced a mortgage on which you already had been
reducing points proportionately, you could be eligible for a tax
bonus. Now you can subtract any part of the points for the
mortgage already paid off that you had not yet deducted since
the year of refinancing.
The precise moment to refinance a home is complicated to figure
out. However, it is undeniable that such a moment will arrive,
probably several times over the course of a 30 year mortgage.
Just be prepared to act when the time comes.