When to Refinance your Home
Interest rates are creeping back up from all-time lows, but are still attractive enough to encourage people to consider refinancing their homes. There are two reasons for refinancing: To obtain extra cash from equity, or to lower payments by taking advantage of lower interest rates. In either case, refinancing can offer tremendous advantages.
However, there are also some risks involved, and before signing on the dotted line, there are a few things to consider. First of all, don't succumb to pressure. There are some unscrupulous mortgage lenders out there who take advantage. In particular, beware of door-to-door contractors who offer to do work on your home, saying that they have "arrangements" with a finance company. Those arrangements are typically usurious. Deal with reputable companies, and do some research on them before making a deal.
Once you have found a reputable financial institution to handle your refinance, take a careful look at what fees are involved. It's true that refinancing can cut your interest payments, sometimes significantly--but there may be points and other fees involved. If you are adept at math, you can easily calculate a break-even point to determine what level of fees are acceptable. The total amount of fees should be less than the total savings you will realize over the duration of the time you expect to continue living in your home. If you plan on staying in your home for the rest of your life, it may be worthwhile to refinance, even if you have to pay some high up-front fees. On the other hand, if you are planning to move in five years, those high up-front fees may well eliminate all the savings in interest you would see during that five-year period.
Generally, you can save money if your current interest rate is at least two points above what you can get on a refinance deal. When considering any type of major financial transaction, it is always advisable to compare offerings from several different financial institutions. However, the mortgage company that holds your existing mortgage would be the best place to start when looking to refinance. There are some considerable expenses involved in refinancing, but if you refinance through the same company you used for your original mortgage, you may be able to save on some of those expenses and closing costs.
Cash out
refinance
A "cash out" refinance lets you cash in on some of the equity in your home to get needed cash for expenses such as college tuition or home renovations. Since this will leave you owing more than before, it is likely that your mortgage payments will increase, and you will also have to pay up-front fees. Carefully factor these things into your calculations before deciding on a cash out refinance, and make sure the new mortgage payment will be affordable. If your original mortgage carries a very high rate of interest, and your refinance will offer a significantly lower rate, it may be possible for you to get cash out and still be left with the same monthly payment.
Finally, the tax ramifications must be considered. Mortgage interest is deductible, but only up to the value of the home. If you take advantage of one of the more esoteric products that allow you to borrow 110% or 125% of the value of your home, you will only get to deduct interest on the portion of your mortgage that is equal to your home's value.
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