Refinancing and Home Equity Options
Refinance for Savings
The equity in your home can be your greatest financial
resource when you need money. Are you looking to pay off higher rate credit
cards? Do you want to make some improvements to your home? What about financing
your child's education or taking that dream vacation you've always wanted? With
a home equity line or loan, you can make your dreams a
reality. Let's take a look at which option may be right for your unique
borrowing needs.
As a next step, ask yourself these three questions, and see why they're so important.
1. How long do you plan to stay in your house?
The most important question you can ask when considering refinancing is: Will you be in your home long enough to reap the benefits despite its costs? If you plan to be in your home three years or less, you probably have little or nothing to gain by refinancing except a passel of paperwork. However, if you know you'll be in your current house five years or more, refinancing could make for substantial savings.
2. What will a refinance cost you in points, transaction fees, and other
closing costs?
Ask your lender for an amortization chart showing the real expense of pre-paying interest points and for a modified Annual Percentage Rate (APR) spreadsheet combining these costs over the years you estimate keeping your home. If you're considering a no-points loan, weigh carefully the additional interest and other fees that may be hidden in higher mortgage rates.
3. How long have you held your current mortgage?
If you're on the "back end" of a fixed-rate loan—meaning you've already taken advantage of most of your tax-deductible interest—taking out a new loan could be beneficial, since you can deduct the interest and prorated points year by year.
Potential disadvantages of refinancing
Unlike a first mortgage, tax deductions for points are amortized over the life of the loan, not all together in the year you pay them. (If you sell your house or refinance again in the future, the remainder of the interest you prepaid in points will be deductible in that year.)
If your existing loan agreement includes a prepayment penalty clause, it could negate the benefits of refinancing, since by refinancing you're paying off your current loan to open a new one.
The term of your loan could begin anew from your refinance date. Talk to your lender about negotiating your loan term.
Finally, even if refinancing isn't a good choice today, your lender may be willing to make changes to your current loan to adapt to your needs.
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