When is Refinancing Worth it?
It has been said that it is wise to refinance when your new interest will be at least 2 points under your current rate. Refinancing has a variety of benefits that can make it worth the up-front expenditure several times over. Let's explore the facts and math.
Advantages
When you refinance, you may be able to reduce the interest rate and monthly payment, perhaps significantly. Additionally, you might be given the option of pulling out some of your home equity by "cashing out" a sum of money to fix up your home, consolidate debt, send a child to college, or plan a special vacation. With lower interest rates, you might also get the chance to build your home equity more quickly by switching to a shorter-term mortgage.
The Cost
All of these advantages do cost something, though. You'll pay the same types of closing cost fees as you did with your present home loan. These may include settlement costs, appraisal fees, lender's title insurance, underwriting expenses, and so on. The general rule of thumb is 3% to 5% of the loan amount.
Do the Math
You might think about paying points to reduce your interest rate. If you pay (on average) three percent of the mortgage loan amount initially, your savings for the term of the new mortgage loan can be great. You might be told that the points may be deducted on your income taxes, but since tax regulations can be difficult to keep up with, please speak with your tax professional before depending on this. Are just giving the bank extra money in their hands when you pay points up front? It depends on how long you are planning on living in the home.
Speaking of taxes, once you lower your interest rate, of course you will also be reducing the paid interest amount that you can deduct on your taxes. This is another cost that borrowers should take into account.
Compare your current loan amortization schedule and the new loan amortization schedule and see if it is meeting your goals. You could be starting all over again if you have a loan that's only a couple of years old, and the loan amount and payment could even be higher than the original one. Not all is as you think it is until you do the math.
Your current loan has probably been sold and you are receiving all kinds of mail about refinancing. Did you ever wonder why they keep bombarding you with these offers? Perhaps you need to read about "churning loans" and realize they are just wanting to make money off of you and are not protecting your interests at all.
If you have mortgage insurance attached to the loan presently and the value of the home has increased, then it might be a wise decision to refinance. It's all in the math and your goals.
Ultimately, for most borrowers the total of up-front costs to refinance are paid back soon in savings each month, yet sometimes it takes years to break even after you refinance. We will help you determine which mortgage loan program is the right fit for you, looking at your cash on hand, the likelihood of selling your home in the next few years, and what effect refinancing could have on your taxes. Call me at 941-504-1445 to get you started on the math.