Key Considerations Before Refinancing Your Mortgage
Homeowners should evaluate several factors before refinancing, including upfront costs, how long they plan to stay in the home, the remaining mortgage term, and potential tax consequences.
A common rule of thumb suggests refinancing if it reduces the annual percentage rate (APR) by at least 2%. However, some lenders now offer no-cost refinancing, which may make refinancing beneficial even at smaller rate savings.
Factors to Consider Before Refinancing:
- Time to recover closing costs – Calculate by dividing total closing costs by the monthly savings.
- Impact on tax liability – A lower mortgage interest deduction may reduce tax benefits, particularly for those in higher tax brackets.
- Mortgage term comparison – Compare the remaining payments on the current mortgage to the total payments of the refinanced mortgage. Reducing the original mortgage term is essential for maximizing savings.
- Prepayment penalties – Check if the existing mortgage includes penalties for early payoff.
Making an informed refinancing decision can lead to long-term financial benefits. For more resources, visit www.irs.gov.