There are many “rules of thumb” used to determine when is the right time to refinance a home. You might have heard something like, the interest rate on the new loan must be at least two percent less than the old loan or it is not a good decision.
Another frequently quoted but just as frequently incorrect statement says that if your loan is less than two years old, you shouldn’t refinance now.
Neither of these is entirely accurate. The decision to refinance a home should be based on whether you will own the property long enough to recapture the expenses connected with the new loan.
The procedure can be as simple as subtracting the proposed new house payment from the existing payment to find out what the monthly savings will be. Then, divide the monthly savings into the cost of refinancing to determine the recapture point in months.
If you are planning to stay in the home at least that long, then, in most cases, you should refinance. The only exception is that when the existing mortgage is in the last few years of its life, it could be amortizing very fast. Usually, this will not occur unless you are in the last quarter of the loan life.
On refinancing a home, the points paid to acquire the loan, as well as the loan origination fee, cannot be written off as interest fully in the year paid. They must be spread over the life of the mortgage.
For that reason, you will probably be better off in getting a “par value” loan which means there will be few or no points charged. Even though the rate will be higher, the interest is fully deductible as long as the federal limits are not exceeded, and you can keep the cash in your account to earn interest.
If you are having any difficulty in making a decision, please contact us. We’d be glad to help.