Mortgage Refinancing

The proverbial question for many homeowners these days is “Should I refinance my home mortgage?”  When interest rates are low, and mortgage money available at single digit rates, some people may wish to consider this opportunity.

When contemplating whether to renegotiate your mortgage, careful evaluation is required since it may not be beneficial in all circumstances.  Mortgages can be complicated, so consult with a financial or tax advisor and an attorney before making a decision.

Is refinancing a good move on your part?  This will depend on various factors, including:

• “Up front costs” that will be incurred

• Length of time you anticipate remaining in the home

• Dollar amount to be refinanced

• Spread in current and offered mortgage interest rates

Generally, a good test of whether or not refinancing will be advantageous is to determine the time it will take to recoup the costs incurred.  This period will fluctuate by borrower depending on the factors listed above.

COSTS TO REFINANCE

Refinancing a mortgage generally involves paying closing costs, including appraisal fees, legal fees and, in most instances, an origination fee.  The origination fee, commonly referred to as “points,” is based on a percentage of the amount being refinanced and can represent a substantial expense.  For example, refinancing a $200,000 mortgage at three points will cost an individual $6,000 in origination fees alone.

Other costs to be considered include potential repayment penalties that may be assessed when a loan is paid off early.  An opportunity cost should be recognized equal to the forfeited investment income on monies used to pay for the refinancing.

EQUATING COSTS AND SAVINGS

 When refinancing an existing mortgage at a lower interest rate for the same loan period or longer, your monthly payments obviously will decline.  However, if the new term is shorter, or you borrow more money when refinancing, the monthly payments could increase. Therefore, analyze the potential monthly savings and principal balance changes very carefully. 

Refinancing an existing mortgage could provide thousands of dollars in cash, significantly alter cash flow, lower taxes and save or cost thousands of dollars in the long run.  Lenders are eager.  However, an individual must seriously consider all aspects of such a step before deciding to proceed.

GUIDELINES

Tradition has it that interest on a new mortgage must be 2% lower than interest on an existing mortgage for refinancing to be favorable.  However, do not take the 2% rule as the basis for a final decision.  Even if the new mortgage payments are lower, the property must be held long enough to recover closing costs in order to break even. Also, costs to refinance have dropped significantly over the past few years as the remortgage business has become a large industry.

A complete analysis must include tax bracket, an estimate of the deductible and non-deductible closing costs, repayment penalties (if any) and numerous other factors. It gets even more complicated when two current mortgages exist.

FACTORS TO CONSIDER BEFORE REFINANCING

• Months the property must be retained to “break even

•   In other words, if new mortgage payments are less than the old, how many months after adjustment for tax deductions are required to recoup closing costs

• Amount of new mortgage payment

• Deductible closing costs.

• Non-deductible closing costs

• Total principal & interest paid during current mortgage

• Total principal and interest over term of new mortgage

• Amount of interest saved by refinancing

• Additional interest required by refinancing must also be considered

• Amount to add to payments now to retire mortgage early

•  Compare this to the cost of refinancing

• Interest saved by accelerating payments on mortgage now

Some people may find refinancing their mortgage a very attractive move.  However, like all financial transactions, there is a need for careful analysis, caution and reflection first.

TIPS

Bring your old original Survey, most houses do not move so save $75 to $125 on refinancing costs by not having your house surveyed again.  

Ask about a credit for you original Title Insurance policy, many lenders will give partial credit towards the new Title Insurance policy, You could save $100 to $1500.

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We do not offer legal advice. All information provided on this website is for informational purposes only and is not a substitute for proper legal advice. If you have legal questions, we recommend that you seek the advice of legal professionals.

Tax Disclaimer: To ensure compliance with IRS Rules, any U.S. federal tax advice provided in this communication is not intended or written to be used, and it cannot be used by the recipient or any other taxpayer (i) for the purpose of avoiding tax penalties that may be imposed on the recipient or any other taxpayer under the Internal Revenue Code, or (ii) in promoting, marketing or recommending to another party a partnership or other entity, investment plan, arrangement or other transaction addressed herein.

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Last modified: January 30, 2017