When to Refinance Your Home

Some lenders use the rule of thumb that it is beneficial to refinance your home when there is a difference of 2 percentage points between the old rate and the new one.

Following this "rule" may cQst the homeowner a lot of money. Actually, a very small percentage point spread may justify refinancing if other factors are present.

Other Factors Which Must Be Considered

  • Closing costs: Possible pre-payment penalties on the old loan, points and fees on the new loan and attorney fees generally will total 3% to 4% of the loan and must generally be paid when the new loan closes. The borrower must consider the loss of earning power of these funds in future income projections.
  • Projected length of ownership: The closing costs can be spread over the period of the loan; therefore, the longer the projected period of ownership is, the smaller the spread between the old and new mortgages can be.
  • Income tax bracket of the owner: Higher interest payments mean larger income tax
    deductions; therefore, the effect on one's taxable income must be considered.
  • Loans in excess of 1987 revenue act limits: The interest on loan amounts in excess of acquisition debt on a first and second residence up to $1,000,000 plus $100,000 in home equity loans is not deductible. Acquisition debt refers to loans incurred to buy, construct or substantially improve a qualified residence.

The New Mortgage - Variable Rate or Fixed Rate?

Variable Rate
  • Initially lower interest rate than with a fixed rate loan, but will increase if interest rates go up or decrease if interest rates go down.
  • Most variable rate mortgages have a limit or a cap on annual rate increases and on lifetime increases.1
  • Usually preferred for short-term
    ownership of home; e.g., 2 - 3 yes.
Fixed Rate
  • Rate does not change if interest rates
    go up or down.
  • Best for owners with a fixed income or those who plan to stay in their home for several years.
  • Rates and monthly payments are higher than with a variable loan, at least in the early years.
  • Fixed rate loans may not be assumable.

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1 Be certain that an annual cap is part of the loan and carefully examine the index to which the rate is tied.

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