When is Refinancing Worth it?
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Ever heard the pearl of wisdom that states you should only refinance if your new interest rate is at least 2 points below your current one? Perhaps several years ago that was good advice, but as refinance costs have been getting lower, it could be time to look into it. A refinance is often worth its cost several times over, because of the benefits that it brings, along with a lower interest rate.
You may be able to lower your interest rate (sometimes substantially) and reduce your monthly payment amount with your refinanced mortgage loan. Additionally, you may have the option of tapping into your home equity by "cashing out" some funds to fix up your home, consolidate debt, or take your family on a vacation. With lower rates, you might also be able to build your home equity more quickly by switching to a shorter-term mortgage.
All of these benefits do come with some expense, though. When you refinance, you are paying for basically the same things you were charged for when you obtained your original mortgage. Included in your costs might be an appraisal, underwriting fees, lender's title insurance, settlement costs, and other expenses.
Doing the Math
You could need to pay points (prepaid interest) to gain a more favorable interest rate. If you pay (on average) 3% of the mortgage loan amount at the start, your savings for the term of the refinanced loan can be great. You might have heard that points may be deducted on your income taxes, but since tax regulations are difficult to keep up with, please speak with your tax professional before considering this in your calculations.
An additional cost that a borrower may consider is that a reduced interest rate will lower the interest amount you will deduct from your federal income taxes. Call us at 714-970-9700 to help you do the math.
Most people find that the savings each month balance out the up-front expenses of a refinance. We'll help you determine what program is ideal for you, taking into account your cash on hand, how likely you are to sell your residence in the next few years, and what effect refinancing will probably have on your taxes. Call us at 714-970-9700 to get started.
Want to know more about refinancing? Give us a call at 714-970-9700.