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| Is It ReFi Time? |
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Millions of people are taking advantage of the current opportunity to refinance
the mortgage on their homes. Rising home prices combined with falling interest
rates have motivated people to convert their accumulated home equity into
expendable funds. This frequently works to their immediate advantage, giving
them a considerably lower interest rate and lower monthly mortgage payments.
Homeowners can choose either to spend or save the portion of their
incomes that are no longer being spent on mortgage payments.
When Should
You Refinance?
In some cases, when refinancing, it helps to borrow more
than is needed to pay off the earlier mortgage. This gives you the equity from
your home, plus extra funds to cover the transaction costs of refinancing.
People use the funds for a variety of purposes: to make home improvements, to
repay older debts, or to buy goods, services or assets they couldn't otherwise
afford.
How much can you save by refinancing? This depends on several
factors relating to your present mortgage situation. If your new interest rate
is low, it can result in substantial savings, perhaps even thousands of dollars.
And when rates rise, having refinanced from a variable rate loan to a
conventional loan, you can stand to gain substantially.
Some Benefits Of
Refinancing
Refinance a home mortgage is a big decision and should be
approached with careful consideration of the potential costs and benefits.
Clearly, when interest rates on mortgages fall below the rate on your existing
loan, it's time to consider refinancing. This is the time to evaluate your
potential after-tax savings from lower monthly payments, and compare it with the
after-tax expenses of refinancing. These expenses include mortgage fees or
points, application fees and appraisal fees. As the loan is repaid, the savings
from your lower interest payments begin to accumulate. The savings due to
refinancing must be discounted at the present rate and compared with the
transaction or closing costs.
If you're considering refinancing your
home, you need to evaluate your current interest rate. If your new interest rate
would be more than 5/8% lower than your current interest rate, it is well worth
refinancing. But if you want to keep your closing costs as low as possible, see
that your new interest rate is at least 1% lower.
Why Refinance?
Most people who refinance do so to save money, but there are other
reasons to do so. If you refinance your existing loan at a lower rate of
interest, you can end up with a lower monthly mortgage payment. This can save
you funds in the long run.
Debt Consolidation
In many cases, you
can clear all your outstanding debts and replace them with just one low-cost
monthly outlay. Refinancing your home to consolidate your debts (such as a
credit card balance or a student loan) can save you money in the short run and
the long run, because you'll be paying on a low-interest loan rather than a
high-interest one.
Tax Advantages
If you have lower interest
rates, it means smaller interest deductions on Schedule A. You are allowed to
deduct interest on a debt of up to $1 million incurred to buy your primary
residence and one more home. Also deductible is the interest on up to $100,000
of home equity loans for these two residences. If you refinance a mortgage, the
interest on this loan is deductible to the limit of old mortgage plus $100,000.
The interest charges you pay up-front, or points, are really interest
that's pre-paid and must therefore be deducted proportionately during the tenure
unless you have purchased or improved your existing principal property.
If you have bought investment real estate or a vacation home, you can
deduct points proportionately over the loan term. If you have refinanced a
mortgage on which you already had been reducing points proportionately, you
could be eligible for a tax bonus. Now you can subtract any part of the points
for the mortgage already paid off that you had not yet deducted since the year
of refinancing.
The precise moment to refinance a home is complicated to
figure out. However, it is undeniable that such a moment will arrive, probably
several times over the course of a 30 year mortgage. Just be prepared to act
when the time comes.
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