Is Re-Financing Always Worth It?
This is a very essential question which all homeowners should ask
themselves both at the start and towards the end of the course of
re-financing. The reply 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.
Establish Financial Goals
This should be the first step in the process of resolving whether or
not re-financing is worthwhile. Without this step, a homeowner
cannot accurate answer the question of the worth of re-financing
because the homeowner may not fully understand his own financial
goals. While financial goals may run the gamut from one extreme to
another the most basic question to ask is 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.
Do You Want to Save Money in the Long Run?
Homeowners who create a goal of saving money in the long run should
think about 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. This is
significant because paying less interest will result in a greater
cost savings.
Take into account an example where a homeowner has an pre-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.
Do You Want to Increase Your Monthly Cash Flow?
Some homeowners may have a elected goal of increasing their monthly
cash flow. For these homeowners 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 in which they
are able to extend their loan terms. This means 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.
How Will Re-Financing Affect Tax Deductions?
This is an additional serious contemplation for homeowners who are
interested in investigating the possibility of re-financing. The
interest paid on a home loan is often tax deductible. A homeowner
who re-finances 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 amplified for homeowners
who were previously just below a significant tax break line. A
significant 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, homeowners who are considering
re-financing should have a tax preparation professional determine
the ramifications re-financing will have on their tax return before
a decision is made.
ABOUT THE AUTHOR
Bob Schwartz, is a Certified Residential
Specialist, CA licensed real estate broker with
www.Brokerforyou.com. Bob
has over 27 years of residential real estate experience, authored a
number of published articles and served as an expert witness for
San Diego lawyers. You can contact
Bob via e-mail at bob@brokerforyou.com or visit his highly popular
San Diego real estate website at:
http://www.brokerforyou.com
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