Useful Information about Re-Financing

Deciding to begin the process of refinancing, all homeowners should ask themselves one important question. And this question will be the next: “Is re-financing always worthwhile?”. The answer to this question can spur the homeowner to investigate re-financing further or convince the homeowner to table the thoughts of re-financing for the moment and concentrate on other aspect of owning a home.

The first step in the process of determining whether or not re-financing is worthwhile will be establishing financial goals. Skipping this step, a homeowner cannot accurate answer the question of the worth of re-financing because of his incomplete understanding of his own financial goals. While making financial goals you will have the basic question to be asked:  whether the more significant goal is long term savings or increased monthly cash flow. This is important because re-financing can usually achieve these two goals.

Homeowners establishing a goal of saving money in the long run should consider re-financing options such as lower interest rates or shorter loan terms. Both of these options can considerably lower the amount of interest the homeowner is paying on the loan. Paying less interest will result in a greater cost savings.

There is an example for better understanding of that. When a homeowner has an existing debt of $100,000, an interest rate of 6.25% and a loan term of 30 years, just by reducing the loan term to 15 years the homeowner can significantly decrease the amount which is paid in interest during the course of the loan. However, this option will also result in an increase in the monthly payments made by the homeowner. Therefore this type of re-financing option may only be available to those who have enough cash flow to compensate for the increase in monthly payments. 

When homeowner has chosen a goal to increase his monthly cash flow the overall cost savings may not be as important as having more money available to them each month. These homeowners might consider a re-financing option to be able to extend their loan terms. Thereby they will be repaying the existing debt over a longer period of time. The homeowner will pay more in interest in the long run but will achieve their goal of lower monthly payments and an increased cash flow.

There is one more serious and not less important question to answer for those who are interested in investigating the possibility of re-financing. How will re-financing affect tax deductions? The interest paid on a home loan is often tax deductible. A homeowners re-financing in a manner which results in less interest being paid annually may adversely affect their tax strategy. The implications of this type of chance can be reinforced for homeowners who were previously just below a significant tax break line.

Decrease in the amount of interest paid will mean a significant decrease in the deduction the homeowner is allowed to take. This reduced deduction can put the homeowner in an entirely different tax bracket and could end up costing the homeowner money in the long run. For this reason, considering re-financing one should have a tax preparation professional determine the ramifications re-financing will have on their tax return before making decision.