Refinancing refers to applying for a secured loan intended to replace an existing loan secured by the same assets. The most common consumer refinancing is for a home mortgage. A refinanced mortgage is one in which a borrower pays down an old loan with a new loan. People who refinance a mortgage tend do so to get a lower interest rate, lowering their payments or to take cash out of their home equity.No-cash-out refinancing occurs when the amount of your new loan doesn't exceed your current mortgage debt (plus points and closing costs). With this type of refinancing, you may be able to borrow as much as 95 percent of your home's appraised value.
Refinancing can often save you money over the life of your mortgage loan. But there is a price. Usually, you'll need to pay an assortment of up-front fees, including points and closing costs. Some lenders often advertise "no points, no closing costs" refinancing deals. They normally either charge a higher interest rate or combine the costs into your overall loan balance.
Tax issues to consider
You are generally able to deduct qualified interest that you pay on a mortgage to buy, build, or improve your home, provided that the mortgage is secured by your home and meets certain dollar limits. This is known as "home acquisition indebtedness" for tax purposes. If you refinance your home, the interest on the new debt you incur also qualifies, but only up to the amount of the refinanced debt.
Why refinance?
- You may want to lower your monthly mortgage payment by refinancing to a lower interest rate
- You may be interested in refinancing to a lesser loan term (e.g., from a 30-year mortgage to a 15-year mortgage), allowing you to own your home free and clear in less time
- You may be looking to do a cash-out refinancing or tap into your home equity in order to access some extra cash for home improvements, pay for college, or consolidate debt
- You may want to refinance your adjustable rate mortgage (ARM) to a fixed rate mortgage or a new ARM with better terms
If you want to refinance because you want to tap into the equity of your home, you can also consider obtaining a home equity loan or opening a home equity line of credit.
An old rule of thumb is that you should not refinance unless interest rates are at least 2 percent lower than the interest rate on your current mortgage. In many cases, even a 1 to 1.5% difference may be worthwhile to some homeowners.
Actually, a number of factors; such as the duration you plan to stay in your current home, costs of getting the new loan, amount of equity you have in your home, enter into the decision of when to refinance.
Summarizing the above, it will be worth your while to refinance if you're sure that you'll be able to recoup the cost of refinancing during the time you own the home. It is important to calculate the point at which you'll begin to save money after paying fees or closing costs. It is often considered ideal if you can recover your refinancing costs within one year or less.
Closing costs
- Application fee
- Appraisal fee
- Credit report fee
- Attorney/legal fees
- Loan origination fee
- Survey costs
- Taxes
- Title search
- Title insurance
Tools to assist you
The following tools can assist you in making a decision: