Refinancing a Home Mortgage Loan
Many times refinancing a home mortgage loan can prove to be very helpful. The huge reduction in interest rates in recent years has led to a large number of homeowners refinancing their home loans. This helps in reducing the monthly installment they pay. Thus, you can save a good amount of money per month just by replacing your old mortgage with a new one which has a lesser interest rate.
However, refinancing a home mortgage loan comes with a lot of extra work. There is quite a bit of paperwork you will need to fill out and all the various fees can definitely put a lot of additional pressure on your finances.
The option of refinancing may be a good choice for you if you have an adjustable rate mortgage and the rate of interest is expected to increase. You may save a lot of money by switching to a fixed rate home loan that has a lower interest rate. Knowing that your mortgage payments will not be subject to annual fluctuations can be reassuring.
If you have opted for a balloon mortgage where the last payment is quite large, refinancing may be your best option as well. If you have the money set aside to pay off the balloon payment, then you are definitely among the minority. Most people facing a large balloon payment have only two options.. either refinance the loan or sell the home and move on.
Some people refinance their home loan not just for the reduction in interest rates, or for paying off a large balloon payment, but also to generate cash for other purposes like home improvement, starting a new business or putting kids through college.
However, you must remember that refinancing comes with a fee. You might be able to get your payments lowered but you will still need to pay refinancing charges, similar to the closing costs you paid when you first purchased your home. You must carefully consider the expense involved before opting to refinance your home loan. It could take some time to recoup these costs.
Calculate your Refinance Savings:
The point at which you will begin saving depends on a couple of things – the length of time you plan to stay in the home after refinancing, as well as the difference between the old interest rate and the new rate. The savings will definitely be worth it if your interest rate will drop significantly and if you are planning to stay in the home for quite a few more years.
Suppose the new payment after refinancing your home loan will be $1300, compared to the current mortgage payment of $1600 then the saving amounts to $300 a month.
However, you must keep in mind that with the monthly saving also comes a reduction in tax write off. The amount you can deduct on your tax return is diminished as well as the interest payment is decreased.
For example, if you are in a 25% tax bracket, the savings will also be reduced by 25%. If you take 25% x $300 this equals $75. Thus, the monthly savings after refinancing is actually $225 and not $300.
The time it will take before you have recovered your expenses and will actually begin saving can be found by dividing the refinancing cost by the monthly savings. Thus, if the total refinancing costs are $4800, then $4,800 / $225 = 21.3 months.
If you are planning to stay in the home for a few more years then refinancing makes sense. However, if you think you may be leaving sooner than 22 months then refinancing your home loan may not be a wise decision.
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