What does it cost to refinance? What are the benefits?
Ever heard the old rule of thumb, you should only refinance if your new interest rate is at least one point lower? That may have been true years ago, but is no longer true in every case.
What if you plan to move in a few years? What if you can fix several things with a refinance? What if other issues need to be examined? In most cases, the correct answer is too complex to be solved with any archaic rule, as the best choice for you may depend on other factors..
When you refinance, you might be able to lower your interest rate and monthly payment -- sometimes significantly. You might also be able to "cash out" some of the built-up equity in your home, which you can use to consolidate debt, improve your home, and take a vacation -- whatever! With lower rates and balances, you might also be able to build up home equity faster with a shorter-term new mortgage.
All these benefits do cost something, however. When you refinance, you are paying for most of the same things you paid for when you obtained your original mortgage. These might include settlement costs and other fees, an appraisal, lender's title insurance, underwriting fees, and so on.
You might have to pay a penalty if you refinance your previous mortgage too quickly. That depends on the terms of your existing mortgage. These penalties usually apply only for the first year or two.
You might decide to pay points to get a lower interest rate. Points paid for the purpose of refinancing your home mortgage cannot be deducted in their entirety in the year you pay them, unless the refinanced loan is primarily for home improvements. This would mean that the deductibility of points paid in a home refinance would be amortized over the life of the loan. Generally, points paid for a purchase loan are fully deductible in the year of the purchase. Consult your tax professional before deducting points you pay on your new mortgage from your federal income taxes.
Speaking of taxes, if you lower your interest rate, naturally you will be lowering the amount of mortgage interest payments you can deduct from your federal income taxes. This is another cost that some borrowers consider. We can help with the math!
Ultimately, for most people the amount of up-front costs to refinance are made up very quickly in monthly savings. We'll work with you to determine what program is best for you, considering your cash on hand, how likely you are to sell your home in the near future, and what effect refinancing might have on your taxes, cash flow, and future goals.
