Before refinancing, homeowners need to consider up-front costs, how long the homeowner will live in the home, how much time is left on the current mortgage, and the income tax consequences. A common rule of thumb advises refinancing an existing fixed-rate mortgage if it would save two percent or more on the annual percentage rate. However no-cost refinancing now offered by some lenders can change this so it's advantageous to refinance at any rate savings.
Refinancing Considerations:
--Number of months to recoup closing costs. Calculated by dividing total closing costs by the monthly savings.
--Increase in tax liability. Due to a lower mortgage interest deduction, less tax benefit is generated by the lower interest rate (especially for taxpayers in high tax brackets or taxpayers with a small spread between interest rates).
--Mortgage term. Compare the remaining number of payments of the current mortgage with the total payments of the refinanced mortgage. The term of the original mortgage must be decreased for substantial savings on refinancing to occur.
--Prepayment Penalty. Does existing mortgage have any prepayment penalties.
Refinancing Considerations:
--Number of months to recoup closing costs. Calculated by dividing total closing costs by the monthly savings.
--Increase in tax liability. Due to a lower mortgage interest deduction, less tax benefit is generated by the lower interest rate (especially for taxpayers in high tax brackets or taxpayers with a small spread between interest rates).
--Mortgage term. Compare the remaining number of payments of the current mortgage with the total payments of the refinanced mortgage. The term of the original mortgage must be decreased for substantial savings on refinancing to occur.
--Prepayment Penalty. Does existing mortgage have any prepayment penalties.