|
Is It Refi Time?
By: Ron King
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.
About the Author:
Visit http://www.mortgagerefinancetoday.com to learn more. Ron King is a
full-time researcher, writer, and web developer at http://www.ronxking.com Copyright 2005 Ron King. This article may be reprinted if the resource box is
left intact. |
