Should You Refinance Your Mortgage
Many homeowners seriously consider mortgage refinancing when interest rates drop. Mortgage refinancing becomes particularly appealing when the interest rate on an adjustable rate mortgage is due to reset higher at the same time that fixed interest rates drop. How can you be sure that mortgage refinancing is the right financial strategy for you.
The first question to ask youself is how long you intend to remain in your current home. Mortgage refinancing closing costs, which are the same as those you paid when first purchasing your home, will take up to two years to recover out of your monthly mortgage payment savings before you begin to realize true savings. These costs may include loan application, home appraisal and credit review fees, document preparation fees, costs associated with title report preparation and review, bank attorney fees and county clerk recording and filing fees and can run into the thousands of dollars. Regardless of whether you pay those costs out of mortgage proceeds or out of pocket, you still do not actually begin realizing savings on your monthly mortgage payments until you have entirely recouped those closing costs. Therefore, it makes no financial sense to consider mortgage refinancing if you intend to move within the next year or two.
Homeowners consider mortgage refinancing for reasons other than avoiding an interest rate reset. Some refinance their mortgages in order to secure different loan terms for themselves. Shortening the length of the loan may increase monthly mortgage payments in the short term but will lead to an earlier payoff. Conversely, lengthening the loan lowers monthly mortgage payments but leads to a later payoff. Your personal financial circumstances determine which strategy you choose.
Others refinance to access the equity in their homes to pay down consumer debt or finance home improvements. This strategy is often employed in order to gain an income tax deduction for the interest paid out on what originally was installment debt. The interest paid on outright consumer debt repayments is not tax deductible, whereas mortgage interest is.