Home Refinancing and taxes |
Refinancing
When you refinance a mortgage, a homeowner is actually replacing
an existing mortgage with a new mortgage on the same property. This
new mortgage will pay off the old mortgage. It may have different
terms than the old mortgage. Refinancing usually involves new loan
costs and extra paperwork.
Why should you Refinance?
There are several reasons why you would want to refinance your current
mortgage. The most popular reason is to get a lower interest rate
on your loan. The other factors for refinancing may include wanting
to change from a fixed-rate loan to an adjustable-rate loan or the
other way around, to cease payments on private mortgage insurance
(PMI) or even to get cash out of your home's equity.
It is possible to save money by changing to an adjustable rate mortgage
(ARM), especially if homeowners are planning to sell their home
in a short time. And that is why refinancing is so common. ARM rates
are usually two percent points less than fixed rates.
If you had initially borrowed more than 80% of the home's value,
you may have been required to pay for PMI as well. If you've been
paying for your home for many years, or its value has increased
considerably, since you bought it, you may be able to get out of
paying for PMI.
Another common reason for refinancing is to get cash for big expenditures
like tuition, home repairs, weddings or purchasing of vehicles.
Is Refinancing Right For Me?
When rates are low, homeowners will examine the present interest
rates and compare them to the terms of their existing mortgage.
If there is huge difference, with the prevailing rates being lower,
homeowners would prefer to refinance.
However, refinancing does not necessarily benefit every homeowner.
If you have a second mortgage, accumulated debt or bad credit, it
may not be worth refinancing.
1) It is important to first know the amount of equity you own in
your home. If you have financed your home fully or almost to its
full value only a few years ago, you probably don't have enough
equity to make refinancing worthwhile, especially considering closing
costs.
2) Secondly, consider your credit rating and your debt to income
ratio. If you don't have a good credit rating or if you have accumulated
debt, then the rates offered by lenders will usually be higher than
you are paying now, or not worth the costs of refinancing.
There are two other reasons when refinancing is not worthwhile.
-You refinance in order to combine a first mortgage and a home equity
loan, or if you receive enough cash back to cause you to finance
more than 80% again. This will require you to carry PMI and the
extra expense could negate the benefits of refinancing.
-You have been paying on the loan for a long time and are nearing
the end. Refinancing at this stage would mean starting again and
is rarely worth it. You can however, ask the lender about setting
the new loan term for the same amount of time you had remaining
on your old loan.
To decide on refinancing and whether it is the best option for you,
find out the costs for refinancing, including points, transaction
fees, and closing costs, and your new payment amount. Compare this
with your current payment and figure out how long it will take you
to recover the costs as well as how much longer you plan to stay in
the house. If you plan to stay in that home for less than three years,
it's usually not cost beneficial to refinance.
Our mortgage calculators
can help you figure out the costs and benefits of refinancing!
Home Refinancing and Tax Benefits
Individuals who refinance their homes and are tax payers are eligible
for cost deductions associated with their loans. For taxpayers who
itemize points to get a home mortgage may be deductible as mortgage
interest. Points that are paid to receive an original home mortgage
can be fully deductible in the year that it is paid depending on
some circumstances. However, points paid only to refinance a home
mortgage are generally deducted over the term of the loan.
For a refinanced mortgage, the interest deduction for points is
done by dividing the points paid, by the number of payments to be
made over the term of the loan. This information is usually available
from lenders. Taxpayers can deduct points only for those payments
made in the tax year. For example, a homeowner who paid $2,000 in
points and who would make 360 payments on a 30-year mortgage could
deduct $5.56 per monthly payment, or a total of $66.72 if he or
she made 12 payments in one year.
However, if any part of the refinanced mortgage money was used to
finance home repairs and if the taxpayer meets certain other criteria,
the points associated with the home repairs may be fully deductible
in the year the points were paid. Also, if a homeowner is refinancing
a mortgage for a second time, the remaining points paid for the
first refinanced mortgage may be fully deductible at pay off.
Other closing costs such as appraisal fees and other non-interest
fee are usually not deductible. Additionally, the amount of Adjusted
Gross Income can affect the amount of deductions that can be taken.
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