The proverbial question for many homeowners these days is “Should I refinance my home mortgage?” When interest rates are low, and mortgage money available at single digit rates, some people may wish to consider this opportunity.
When contemplating whether to renegotiate your mortgage, careful evaluation is required since it may not be beneficial in all circumstances. Mortgages can be complicated, so consult with a financial or tax advisor and an attorney before making a decision.
Is refinancing a good move on your part? This will depend on various factors, including:
Generally, a good test of whether or not refinancing will be advantageous is to determine the time it will take to recoup the costs incurred. This period will fluctuate by borrower depending on the factors listed above.
COSTS TO REFINANCE
Refinancing a mortgage generally involves paying
closing costs, including appraisal fees, legal fees and, in most instances, an
origination fee. The origination
fee, commonly referred to as “points,” is based on a percentage of the
amount being refinanced and can represent a substantial expense. For example, refinancing a $200,000 mortgage at three points
will cost an individual $6,000 in origination fees alone.
Other costs to be considered include potential
repayment penalties that may be assessed when a loan is paid off early.
An opportunity cost should be recognized equal to the forfeited
investment income on monies used to pay for the refinancing.
EQUATING COSTS AND SAVINGS
When refinancing an existing mortgage at a lower
interest rate for the same loan period or longer, your monthly payments
obviously will decline. However, if
the new term is shorter, or you borrow more money when refinancing, the monthly
payments could increase. Therefore, analyze the potential monthly savings and
principal balance changes very carefully.
Refinancing an existing mortgage could provide thousands of dollars in cash, significantly alter cash flow, lower taxes and save or cost thousands of dollars in the long run. Lenders are eager. However, an individual must seriously consider all aspects of such a step before deciding to proceed.
Tradition has it that interest on a new mortgage must
be 2% lower than interest on an existing mortgage for refinancing to be
favorable. However, do not take the
2% rule as the basis for a final decision.
Even if the new mortgage payments are lower, the property must be held
long enough to recover closing costs in order to break even. Also, costs
to refinance have dropped significantly over the past few years as the
remortgage business has become a large industry.
A complete analysis must include tax bracket, an estimate of the deductible and non-deductible closing costs, repayment penalties (if any) and numerous other factors. It gets even more complicated when two current mortgages exist.
FACTORS TO CONSIDER BEFORE REFINANCING
Some people may find refinancing their mortgage a very attractive move. However, like all financial transactions, there is a need for careful analysis, caution and reflection first.
Bring your old original Survey, most houses do not move so save $75 to $125 on refinancing costs by not having your house surveyed again.
Ask about a credit for you original Title Insurance policy, many lenders will give partial credit towards the new Title Insurance policy, You could save $100 to $1500.
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.
Copyright © 2017
Wink Tax Services / Wink Inc.