Is It Time to Refinance?

Julie Armstrong, CPA

You may have heard that home mortgage rates are currently at a thirty-year low, which makes it an excellent time to consider refinancing an existing mortgage.

THERE ARE SEVERAL MOTIVATIONS FOR REFINANCING.

Lower your monthly mortgage payment:
Traditionally it required a 1.5% rate differential for a refinance to be beneficial. However, in these times of larger mortgages and reduced refinance fees, a drop of just one-half to three-quarters of a percentage point can reduce your monthly payment and lower interest costs.

Adjust the length of your mortgage:
The lower rates may enable you to decrease the term of your mortgage with little change in monthly payments. In addition, shorter term mortgages (e.g. fifteen-year versus thirty-year) generally have lower interest rates.

Change from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage:
With rates at an all time low, it might be the time to lock in a rate for longer than a five or seven-year time-frame.

Obtain an ARM with better terms or change from a fixed-rate mortgage to an ARM:
You may know that you would like to move to a different home in the next five to nine years. You might be able to take advantage of the lower ARM rates to work into your time frame for a new home.

Obtain cash from your home equity:
You may want to finance an important home improvement, pay for college or pay off high-interest credit card debt. However, interest on debt in excess of your current mortgage plus any substantial improvements planned for the refinance proceeds are not deductible as an itemized deduction for tax purposes.

Considerations for making the refinancing decision:
First, are you eligible to refinance? The loan-to-value ratio has to be within the lending guidelines and your credit score should be as high as or higher than when you obtained your current mortgage. Second, how much will it cost to refinance? Costs may include an application fee, a loan origination fee, points, appraisal fee and other closing fees. It would be worthwhile to calculate the break-even period—the time it will take to recover your refinancing costs before you benefit from a lower mortgage rate. Most lenders have online mortgage calculators designed to calculate the costs of refinancing.

President Obama is proposing a limit to the home mortgage deduction for high-income taxpayers, but the Senate Finance Committee has stated than any changes to current system would be made with the utmost care and significant transition periods.

Shop to obtain the best financing deal:
Shopping, comparing and negotiating may save you lots of money in the long run. It might be best to obtain a copy of your credit report to make sure the information is accurate. There are also several mortgage shopping worksheets that will help you negotiate the best deal. Wilson, LLP will be happy to assist in finding the best route for you.