To Refinance or Not to Refinance?

The answer varies depending on how much longer you plan on living at your home, the tax bracket you fall into, and the costs and charges included when refinancing. There are also many other factors to consider when deciding to refinance your mortgage loan. Is the current interest rate low enough to save you money? Should you change the type of mortgage you currently have? How will refinancing affect your payments? These are great questions to ask yourself when deciding to refinance or not.

What's involved in refinancing?

In refinancing your mortgage, you are paying most of the same costs as your original mortgage. Basically you are paying off your original mortgage loan and obtaining a new one with a better rate. Make sure to find out all the costs involved when getting a new loan.

Will you save money when you refinance? To determine this you will need to find out what your new payment will be. To find out the length of time it will take to reclaim the costs of refinancing, divide your closing costs by the difference between your new and old monthly payments.

How many points will the lender charge to refinance? Lenders will offer a wide range of interest rates at different amount of points. A general rule is that each point adds about 1/8 to 1/25 of 1% to the interest rate. The more points a lender charges, the lower the interest rate on the mortgage loan and vice versa.

Will this affect the taxes you pay? Your tax payment may increase due to the less interest you deduct on your income tax return because of the lower interest rate on your mortgage loan. This in turn will decrease the total savings you might get from a lower-interest mortgage.

Do you have to refinance with the same lender? No you do not have to refinance your mortgage with the same lender. However, some lenders will offer certain incentives such as lower interest rates and reduced closing costs to keep your business. Shopping around is key before making a final decision. While deciding on which lender to go with, you might also want to consider other types of mortgages. Situation changes all the time so it doesn't hurt to see if other mortgage loans will suit you better.