Mortgage Refinancing Help

Time for some truth

Lenders dangle the term "refinancing" as the proverbial carrot before a donkey in front of homeowners. So it's no wonder that lured by promises of smaller monthly payments and better equity, many rush into this financial gambit without properly evaluating the costs and benefits of their situation.

It suits me, it suits me not

While paying off your present mortgage and taking out a new one can mean big savings over a span of several years, refinancing may come with a price in the short term. If you're refinancing in order to pay less interest, chances are you won't see the savings right away. One reason for this is that lenders usually charge fees when a homeowner takes out a new mortgage, and there also might be a penalty for getting out of the old one. To determine whether refinancing makes financial sense for you, consider these issues.

How long you plan to be in your home: If you expect to move in a year or two, refinancing would not provide much savings. The longer you plan to stay in your current home, the more sense it makes to refinance.

Prepayment penalty on your current mortgage: Many mortgages carry a penalty if you pay them off early. The amount varies, but it is usually a small percentage of the outstanding balance, or several months' worth of interest payments. Take that into account before you decide to refinance.

Costs of the new mortgage: When you take out a new loan, your lender may charge a number of fees including application, appraisal, origination, and insurance fees. In addition, there may be title search, insurance, and legal costs that can add up to thousands of dollars. This means that these costs may easily eat up any potential savings unless your new interest rate is at least a half percentage point lower than your current one.

Reduced tax savings: If you claim mortgage interest on your tax return, refinancing to a lower rate will mean that you'll have less mortgage interest to deduct. You still will save money overall, but your real savings from refinancing may not be as large as you hoped for.

Is it really worth it?

In order to decide whether the cost of refinancing is worth it, you need to start with the amount you will save by lowering your monthly payment. Then add up all the costs associated with refinancing and divide the total by your monthly savings. This will reveal the number of months it will take to reach the break-even point. However, several other factors, including your tax situation, whether you pay closing costs upfront or add them to the principal of your new mortgage, and your current property value need to be taken into account before you get the complete picture of your potential savings.

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