Refinancing your Home

pstrongFinancial Considerations in Refinancing your House: Pros and Cons/strong/ppIf you’ve owned your home for a couple of years, you might have started thinking about refinancing. Maybe interest rates have dropped, and you want to save money, or you want to tap into your home’s equity to remodel your kitchen./ppLearn about the pros and cons of refinancing your house and how it could impact your financial situation so you can make the best decision for your family./ppstrongPros of Refinancing your House/strong/ppHere are some of the reasons why you might consider refinancing./pulliLock in a lower interest rate and lower monthly payment/liliRefinance into a better loan product/liliFree up equity for a remodel or other purposes/li/ulpInterest rates fluctuate over time. If rates have dropped significantly since you first bought your home, it could be worthwhile to refinance. Since you’ll pay fees to refinance, most financial advisors recommend that you plan on staying in your home for at least five years after the refinance./ppAnother reason to refinance is to get into a better loan product. An Adjustable Rate Mortgage, or ARM, enables homeowners who expect their income to grow in the future to get into a home now. But after a set time period, typically five years, the interest rate resets. To avoid a rate hike, you might think about refinancing./ppWhile home appreciation isn’t guaranteed, in most cases, your home’s value will grow over time. A cash-out refinance allows you to tap into your increased equity. You could use it to remodel your kitchen, pay for a child’s college education, or consolidate and pay off higher-interest debt./ppWhatever your reasons for thinking about refinancing, weigh them against the downsides of the process./ppstrongDownsides to Refinancing your House/strong/ppThere are costs involved in a refinance which you should consider before filling out the online application. Banks charge fees which could become substantial. Evaluate those fees against the cost savings of a lower mortgage payment, and take into account how long you plan on staying in your residence, before going through with a refinance./ppCommon fees you might have to pay include;/pulliApplication fees/liliProcessing fees/liliUnderwriting fees/liliAppraisal fees/liliInspection fees/liliTitle fees/liliAttorney fees/liliRecording fees/li/ulpOn average, fees could be between 2-4% of the amount you’re refinancing. That percent doesn’t include any mortgage interest, or points, that the lender could ask you to pay at closing. If you don’t have this money available, or if spending it would negatively impact your finances, a refinance isn’t a good idea./ppIn addition to the expense of refinancing, there’s your time. Applying to refinance a home takes just as much time as applying for a mortgage. The underwriters will request the same amount of information, from paystubs to tax returns, and you’ll be busy pulling together documentation and answering questions.  /ppAnother downside to a refinance is that it could reset the clock, so to speak, on paying off your home. If you’re in the 15th year of homeownership on a 30-year loan and you refinance for another 30-year loan, you’ve extended your repayment term. If your goal was to pay off your home sooner, this could be disheartening./ppstrongTax Implications of Refinancing a House – Points Paid/strong/ppRefinancing your house can help reduce your tax burden in April. If you itemize your deductions, you can deduct mortgage interest./ppMost lenders require that you pay points up front in a refinance. This protects their profit on the loan. Points are a href=https://www.irs.gov/taxtopics/tc504tax-deductible/a, either over time or during the year you refinanced your house. To deduct the full amount in the same year, you must meet the following requirements;/pulliYou refinanced your principal residence./liliPaying points is customary where you live./liliThe points you paid weren’t excessively high./liliPoints didn’t cover other fees, such as appraisal and inspection fees./liliCan’t have borrowed from your lender or mortgage broker to pay the points./liliPoints were computed as a percentage of your mortgage’s principal./liliThey’re shown as points on your settlement statement./li/ulpIf the points you paid don’t meet these requirements, you can deduct them over the life of the loan. If you sell the house before you’ve fully deducted the points you paid, you can take the remainder of the points paid as a lump sum in that year. If you have any questions about their deductibility, hire a professional to prepare your taxes./ppstrongTax Implications of Refinancing a House – Interest Paid/strong/ppAnother way that a refinance could impact your taxes would be if the amount you pay in mortgage interest goes up across the board. Some homeowners refinance to get out of an ARM that will be resetting soon and to lock in a fixed payment, not necessarily to get a lower interest rate./ppIf you’re now paying more interest in your monthly payments, you’ll see a bigger deduction at year-end./ppRefinancing your home could be an excellent way to improve monthly cash flow or realize your dreams. Just make sure you have the time available and that a refinance will lead to a net benefit for your financial situation in the long run./p