Should You Refinance?
Refinancing your mortgage should be considered a major financial change. The many variables in refinancing can make this decision a difficult one. Although there is no “right” answer for everyone, if you consider the following factors, refinancing a mortgage just might be a sound financial choice.
First, look at the interest rates. When rates have been falling and are relatively low, this creates a “plus” factor on the side of refinancing.
Second, consider the spread, or difference, between your present mortgage rate and a new, lower rate. As little as 1 ¼ percent could result in a cost savings to you within only a few years.
Third, examine the estimated time you plan to stay in the home. If it were only a year or two, it probably would not pay to change mortgages unless the spread in interest rates is considerable.
Fourth, as in all money matters, look at the tax considerations of refinancing. If you pay less interest, you will have less to deduct on your income tax return. However, it is always better to save a dollar than to spend it, unless the deduction creates a tax savings greater than the dollar spent, which is not the case with mortgage interest.
How Much Should I Borrow?
It is important to understand the law regarding the size of mortgage that is deductible. You can refinance an amount equal to your present mortgage balance plus $100,000 and deduct all the interest.
However, the points paid to refinance are not 100 percent deductible in the first year, but must be spread over the entire length of the mortgage. This factor provides a benefit in favor of a 15-year mortgage rather than a 30-year mortgage.
When purchasing a home, as opposed to refinancing, the deduction applies for mortgages up to $1,000,000 and the points are fully deductible in the first year.
The 1990 tax law created a potential phase out of some itemized deductions including mortgage interest, taxes, donations and miscellaneous deductions. This phase out produces a smaller deduction and is calculated as follows:
1. Determine an amount equal to 3 percent of adjusted gross income in excess of $128,950 (Married Filing Joint) of AGI. (This procedure does not apply if your AGI is less than $128,950.)
2. Then reduce the total deductions for items listed above by that amount.
3. Remember, the maximum phase out is limited to 80 percent of the total of these items.
Amount of deduction lost = $931 ($31,050 x 3 percent).
(Assuming it is 80 percent of total deductions.)
WHAT TYPE OF LOAN?
Should you consider a variable rate mortgage? There is a risk of a return to high interest rates and the inconvenience of changing payment amounts at each adjustment point (normally every six or 12 months). Therefore, fixed rate mortgages have more universal appeal and there are no risks of unwelcome surprises.
However, if you can obtain an adjustable rate loan with the first three years guaranteed, and if you make substantial extra payments against the principal, you might be better off even if the loan rates were adjusted upward at the maximum amount. You or your financial advisor will simply have to “run the numbers.”
Finally, if you have too much money tied up in
personally owned real estate and could adjust to larger monthly payments,
refinancing provides the opportunity to better balance the amount you have in
each investment category.
Once you have done your homework, you may find that refinancing your mortgage just might make good financial sense.
MORTGAGE REFINANCING CHART
When does it pay to refinance? Find the amount on the left closest to what it would cost to refinance your mortgage and the amount at the bottom closest to the amount saved each month. The number where the cost row and the savings column intersect is approximately how many months it will take for refinancing to begin paying off. Actual payback periods will be affected by tax considerations.
NUMBER OF MONTHS IT WILL TAKE FOR
REFINANCING REFINANCING TO PAY OFF
Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.
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Wink Tax Services / Wink Inc.