Deciding to Refinance

Traditionally, homebuyers made the decision on whether or not to refinance by balancing the savings of lower monthly payments against the costs of refinancing. Recently, mortgage companies have introduced “no cost” and low cost refinancing packages which minimize or eliminate the out-of-pocket expenses of refinancing, but often have a higher interest rate, or include the refinancing costs in the loan amount.

With traditional refinancing, the interest rate for your new loan must be about 2 percentage points below the rate of your current mortgage for refinancing to make financial sense. However, with the new low cost and no cost refinancing programs, you can often benefit by refinancing even with a small difference in interest rates.

You should also consider how long you expect to stay in your home. If you'll be moving in a few years, the month-to-month savings may never add up to the costs of refinancing. Even if you plan to move within a few years and the savings do not add up to the cost of refinancing, it might be beneficial to take advantage of the monthly savings in the meantime depending on your financial goals.

Mortgage Refinance Cost

When you refinance your mortgage, you usually pay off your original mortgage and sign a new loan. With a new loan, you again pay most of the same costs you paid to get your original mortgage. These include settlement costs, discount points and other fees.

Depending on the type of mortgage you currently have, you may also be charged a penalty for paying off your loan early. The total expense for refinancing a mortgage depends on the new interest rate, discount points, origination points and other settlement costs required to obtain a loan.

Refinance Once Then Do It Again

When rates fall steadily, refinancing may make sense even if you have refinanced already. If you are considering a second refinancing, don't overlook the potential tax write off. When you pay points to refinance, you must deduct the amount over the life of the loan, usually 30 years. But when you refinance a second time, all of the points that have not yet been deducted from the first refinancing can be written off in a lump sum.

For example, if you refinanced to a 30-year mortgage in 2000 and paid $3,000 in points. By 2007, you would have written off about $700. If you refinance again this year, you could deduct the remaining $2,300 on your 2007 tax return.

Build Home Equity Faster

Many borrowers refinance to shorten the term of their mortgage. But even at low rates, a shorter term means higher monthly payments. The benefit is that you’ll build up equity faster and pay far less in total interest over the life of the loan. 

If you can't afford the payments on a 15-year mortgage, your next best way to build equity is to refinance for less than 30 years. Your Direct Correspondent Lender loan officer can customize your new loan to match the years that are left on your old loan. So if you’ve had your current 30-year loan for five years, you would look for a 25-year loan.

Trade Your ARM for a Fixed Rate

By switching to a fixed rate loan, you can reduce your payment and often lock in a low rate for as long as you own your home.

There are times when an ARM makes sense. If you expect you'll be moving within five years, you can save some money, and avoid rising payments, with a five-year ARM. These loans offer a fixed rate for five years and adjust annually thereafter.

Analyze Your Savings

Your Direct Correspondent Lender loan officer will check the market closely to determine the available rates and costs associated with refinancing. Your loan officer will determine what your new payment would be if you refinanced. You can estimate how long it will take to recover the costs of refinancing by dividing your closing costs by the difference between your new and old monthly payments.

However, the ultimate amount you may save depends on factors such as your total refinancing costs and whether you sell your home in the near future.

Remember, the old rule of thumb was that you shouldn’t refinance unless the new interest rate is at least two percentage points lower. However, most borrowers take advantage zero point loans and low cost refinancing. So, even if your rate change is less than one percentage point, you may be able to save some money by refinancing.

Your Personal Income Taxes

With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That may increase your tax payments and decrease the total savings you get from a new, lower-interest mortgage.

IRS regulations require that interest, or points, paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance, unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. However, if the loan or a portion of the loan is for home improvements, you may be able to deduct the points or a portion of the points. Ask your Direct Correspondent Lender loan officer to check the IRS rulings on refinancing, particularly if you are using the new loan to make home improvements.

Paying Points for a Lower Rate

In refinancing, you can often choose from a range of interest rates at different amounts of points. A point equals one percent of the loan amount. For example, three points on a $100,000 mortgage loan would add $3,000 to the refinancing charges.

Generally, the lower the interest rate on the loan, the more points you may have to pay. You can also refinance with no points, but the rate will be higher.

Your Direct Correspondent Lender loan officer will help you analyze various interest rates and associated points to determine which scenario is most beneficial to your situation.

To decide what combination of rate and points is best for you, your Direct Correspondent Lender loan officer with help you determine how best to balance the amount you can pay up front with the amount you can pay monthly. The less time you keep the loan, the more expensive points become. If you plan to stay in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate.

Most loan programs allow you to finance the points so that you do not have to pay them up front. This means that the points will be added to your loan balance, and you will pay a finance charge on them. Although this may allow you to get the financing, it will also somewhat increase the amount of your monthly payments.

Top Reasons to Refinance 

Get a lower interest rate. This is the reason most people refinance their mortgage. Interest rates may have fallen since you financed your home. By refinancing your mortgage at a lower rate, you will pay less interest over the life of your loan.

Lower your monthly payment amount. There are two ways to lower your monthly payment.  If current interest rates are comparable to your existing rate, you can refinance and lower your mortgage payments by extending the term of your mortgage.  If interest rates drop, you can refinance with your existing term, but at a lower rate.  This will also lower your monthly payment amount.

Convert to a fixed interest rate.  You may have an adjustable-rate mortgage and want to switch to a fixed rate for a consistent mortgage payment each month. You have locked in a great initial borrowing rate on your adjustable rate mortgage. Soon, your mortgage rate will be determined by current market rates. The time since you took out your home loan mortgage, borrowing rates have gone up thanks to a stronger U.S. economy. To get peace of mind and avoid fluctuating mortgage payments, it might be time to switch from an ARM to a fixed rate mortgage loan.

Reduce your loan term. By reducing your loan term and increasing your payment amount, you build equity more quickly and may save thousands of dollars over the life of your loan.

Cash out your equity.  Mortgage interest rates are often lower than consumer loans, resulting in a lower monthly payment. Also, the interest you pay on a mortgage may be tax deductible. You can use the equity you have accumulated in your home for debt consolidation, home improvements, a new car, educational expenses or other financial needs.

There is still time to refinance your mortgage

Talk to your Direct Correspondent Lender loan officer to see if refinancing is right for you. You could save hundreds of dollars every month!