October 1, 2018
Is It Time to Refinance Your Mortgage?
Refinancing is the process of paying off an existing loan with the proceeds from a new mortgage loan and using the same property as collateral. Usually, the interest rate on the new mortgage will be less than the old, the loan will cost less, and you will save money. However, refinancing isn’t appropriate for every homeowner. To know if it’s right for you, understand how these arrangements work.
Many people choose to refinance because the reduced interest rate decreases their monthly mortgage payment, freeing up cash for other expenses. Every percentage point makes a difference. For example, if you refinanced a $200,000, seven-percent interest loan to a loan with six-percent interest, you’d have about $130 more in your pocket each month.
Another reason to refinance is to repay your mortgage faster, which is done by switching a long-term loan for one with a shorter term. With it, your mortgage payment would be higher, but you’d pay much less in interest over the life of the loan while building equity more quickly.
Cash-out refinancing is yet another attractive option. With this type of loan, you’d refinance your current mortgage plus take out some cash from the equity you’ve built up. The benefit? Interest rates on the cashed-out portion are often lower than a home equity loan, or second mortgage.
To determine if refinancing will work in your favor, you’ve got to weigh the savings in interest against the fees associated with refinancing. A new loan means you’ll have to pay most of the same costs you paid the first time around. These may include a loan origination fee, credit report, appraisal fee, attorney documentation preparation fee, settlement costs (such as fees for the title search, and other miscellaneous title company fees), recording fees or transfer taxes, and sometimes a pre-penalty penalty. Some lenders require at least a portion of these to be paid at the time of application, for example the appraisal fee.
To know what combination of rate and closing costs is best for you, compare the amount you can pay up front with the amount you can pay monthly. For example, if your refinancing closing costs are $3,000 and your payments are $125 lower each month, it will take you 24 months to break even.
The Tax Effect
One of the primary advantages of homeownership is the savings you receive on your income taxes-all that interest is tax deductible, after all. Yet if you refinance the loan with a lower interest rate, you’ll have less interest to deduct. The effect may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.
If, however, you are in the final years of your mortgage, your payments probably consist of more principal and less interest. In that case, refinancing your mortgage with a longer-term loan will mean you’ll again pay more in interest-and increase your tax deduction.
The Best Deal
If the idea of refinancing fills you with as much fear as it does excitement, you have reason. This is a major financial decision, and one not to be taken lightly. Thankfully, at FirstLight Federal Credit Union, not only will you have a team of knowledgeable Mortgage Loan Officers to guide you through this process, as a member-owned financial institution, FirstLight is able to offer low competitive rates to its members.
So, is it time to refinance your mortgage? If you will come out ahead financially, then it is worth considering. However, if the difference is minimal or nil, then save yourself the time and trouble. Refinancing is not the magic answer for everyone.