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By Sean A. Kelly

Every day you are bombarded with news from the financial world about the interest rates on home mortgage going down and are an all time low this year. It must have got you inquisitive to find out more. This is the time to evaluate your options and see how it would be beneficial for you. Therefore knowing the ins and the outs of home mortgage refinancing is important. Now mortgage refinancing may work for some and may not work for all people so ponder on what you need in order to qualify for refinancing, the objectives you intend to achieve at favorable terms.

Let us first consider the interest rate as it is creating a refinancing frenzy. See how much they have dropped. The general rule of thumb is that homeowners must save at least a full percentage point (1% or more) to benefit from refinancing at the present time. But don’t just go by the “rules” about how much of a percentage change in interest rates you should look for before you refinance, look at how much money you’ll stand to save. For example, If the rate of interest on a $100,000 loan is lowered from 8% to 7.1% the monthly payment (excluding taxes & insurance) you may make an annual savings of about $900 with the drop of 0.9 % (8 % – 7.1%). A 1% rate reduction is a lot more meaningful if you have a $200,000 mortgage rather than one that’s $100,000. This again translates to the fact that refinance makes sense if you have many more years to pay your mortgage.

Let us consider what you need to refinance home mortgage. Firstly, determine if this is the house you intend to stay for a long term because if you put the house for sale in next 5 years the closing cost would not be worth the refi. Next you need to consider the equity that you have and also the current market value of the house. If the value of the house happens to be lower than your actual mortgage, refinancing won’t make sense as negative equity won’t allow refi to occur. Further also consider the fees, as home mortgage refinancing requires an application fee and appraisal fees and loan origination fees. Lastly your credit score will also play a role in determining the likelihood of refi.

Consider the objective you can achieve by home mortgage refinancing. Other than the most common objective of lowering your interest rate and optimizing your loan structure with shortened pay off terms, you can convert adjustable rate mortgage (ARM) to fixed-rate mortgage (FRM). Another good reason to consider refinance is that you can get the cash out from the equity built up in your home. Basically it means that when you refinance for an amount greater than what you owe on your home, you can receive the difference in a cash payment.

Do you also know that refi has a few perks of its own besides the above benefits? And that is the mortgage interest tax deduction. When you refinance, the amount of the new loan used to pay off the old loan qualifies as home acquisition debt. Any amount over that would be home equity debt. Interest paid on home acquisition debt is generally entirely tax deductible. To understand better see this example :-

Peter owes $200,000 on his mortgage. He takes out a new mortgage for $225,000 and pays of this old mortgage. IRS considers$200,000 as home acquisition debt and the balance 25,000 as home equity debt. Hence the interest paid on 200,000 is generally entirely deductable.

Evaluate the benefits mentioned and see if you can find how refinance works best for you in your situation. As you do your research it is equally important to take this critical decision with right people who will help you to understand better and save more.

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