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Thursday, June24,1993 - THE CHARLOTTE POST - Page3C
By The North Carolina Association Of
Certified Public Accountants
omeowners everywhere are
lining up to trade hi their old
mortgages for new ones with
lower rates or better terms.
While It's tempting to Jump
at the chance for a lower monthly pa3mient,
homeowners should take the time to determine
whether refinancing makes good financial
sense. For homeowners who don't plan to stay
In theh- homes long enough to offset the clos
ing costs, refinancing can be a costly mistake.
In the past, the rule of thumb was that you
should consider refinancing when mortgage
Interest rates fall two percentage points below
your current rate. Over the years, conventional
wisdom about rates, timing and other refinanc
ing factors has changed.
The majority of Individuals who refinance do
so to lower their monthly payments by taking
advantage of a lower interest rate. But borrow
ing at a lower rate Is no longer the only reason
to refinance. For many homeowners who reluc
tantly agreed to an adjustable-rate mortgage
(ARM) when rates were high, refinancing pro
vides the opportunity to switch to a fixed-rate
loan with predictable payment. These people
won't necessarily save a lot of money, but thqr
do get the peace of mind that comes with
knowing that their payments won't change If
Interest rates rise.
For Individuals In need of money, perhaps to
pay tuition bills or finance a new business ven
ture. refinancing Is a way to tap the equity they
have built up In their homes. Equity Includes
the down payment, the amount paid against
the principal of the mortgage and any appreci
ation In the home's market value. If you obtain
a lower Interest rate and your property has
appreciated, you may be able to refinance your
mortgage for a larger amount without a major
Increase In your monthly payment.
You can also use refinancing to switch to a
shorter-term mortgage. A lower Interest rate
can make It possible for you to swap your 30-
year mortgage for a 15-year loan with only a
small Increase In your monthly payment.
Because you will be paying off the principal
faster, you can save thousands of dollars In
Interest costs and down your home outright
The Cost of Refinancing
Refinancing Involves the same complex
process and the same closing fees as obtaining
a first mortgage. In some Instances, upfront
closing costs may delay the financial benefits
of refinancing for several years or even may
make refinancing a losing proposition for you.
This Is why one of your most Important consid
erations hi the decision to refinance Is whether
you plan to stay hi your house lorjg enough to
recoup your refinancing costs.
When you refinance, you may also be faced
with paying points. A point Is equal to 1 per
cent of the loan amount. Points are usually the
most expensive costa associated with refinanc
ing. Other refinancing expenses Include the
cost of a new appraisal to make certain that
your house has maintained Its market value,
the cost of a new title search to verify that you
own the property you are seeking to refinance,
title Insurance, legal fees, and application fees.
Your total closing costs could be as high as 3
to 5 percent of the loan amount. You may be
able to save on closing costs by checking with
your current lender first. Banks that want to
hold onto valuable customers may be willing to
waive certain requirements.
Should You Refinance?
To determine whether or not It makes finan
cial sense for you to refinance your mortgage,
you'll need to find out how long It will take for
your monthly savings to offset the cost of refi
nancing. First, determine what your monthly
payment would be on your new loan. Compare
this amount to your current payment to see
how much you will save each month. If your
current pajmient includes taxes. Insurance,
etc., be sure to exclude these costs for purpos
es of comparison. Next, total all the costs asso
ciated with refinancing. Finally, divide your
total closing costs by the amount you would
save monthly. This resulting figime represents
the number of months It wUl take you to pay
off your refinancing costs. If you don't plan to
stay hi your house long enough to reach this
break-even point, refinancing probably doesn't
make sense for you.
Shopping for a loan
The list of refinancing options has grown to
meet the needs of borrowers and lenders. Your
options Include conventional 15- or 30-year
fixed-rate loans, adjustable-rate mortgages,
and balloon mortgages. The latter variation
offers a rate that Is fixed, usually for seven
years. At the end of seven years, you have the
option of pa3dng off the remainder of the loan
or renegotiating it at the current Interest rate.
Whatever tjrpe of mortgage you select, shop
around for the best Interest rates.
homeowners need to consider the tax Impli
cations of refinancing. First, it's Important to
note that although points paid upfront when
you buy or construct a home are fully
deductible In the year of the purchase. Points
paid In connection with refinancing must be
deducted over the life of the loan, whether you
pay them In cash or add them to the loan
amount. There's one exception: If yo plan to
use part of the new loan for home Improve
ments. the points that are attributable to that
part of the loan are deductible Immediately.
Also remember that a reduction In your
Interest rate means a smaller Interest deduc
tion on your tax return. If you have claimed
extra allowances on your W-4 form based on
your mortgage interest deduction, and refi
nancing significantly reduces the amount of
Interest you pay. you need to recalculate the
number of allowances you have claimed.
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