Is Re-Financing Always Worthwhile?
Refinancing is always an option, but it does not always make good financial sense for everyone. This is a very significant question which all householders should ask themselves both at the beginning and towards the end of the process of re-financing. The answer to this question may spur the householder to inquire re-financing further or convince the householder to table the thoughts of re-financing for the moment and concentrate on other aspect of owning a house.
Establish Financial Goals
This should be the first step in the process of determining whether or not re-financing is worthwhile. Without this step, a householder can’t accurate answer the question of the worth of re-financing as the householder 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 as re-financing may normally achieve these two goals.
Do You Want to Save Money in the Long Run?
Householders who make a goal of saving money in the long run should consider re-financing alternatives such as lower rates of interest or shorter loan conditions. Both of these alternatives may considerably lower the amount of interest the householder is paying on the loan. This is significant because paying less interest will result in a greater cost savings.
Consider an example where a householder has an existing debt of $100,000, a rate of interest of 6.25% and a loan term of 30 years. Just by reducing the loan term to 15 years the householder may importantly decrease the amount which is paid in interest during the course of the loan. However, this alternative will also result in an increase in the every month payments made by the householder. Therefore this type of re-financing alternative may only be available to those who have sufficient cash flow to compensate for the increase in every month payments.
Do You Want to Increase Your Monthly Cash Flow?
A few householders may have a chosen goal of increasing their every month cash flow. For these householders the overall cost savings may not be as important as having more money available to them monthly. These householders might consider a re-financing alternative in which they’re able to extend their loan terms. This means they’ll be refunding the existing debt over a longer time period. The householder will pay more in interest in the long run but will achieve their goal of lower every month payments and an increased cash flow.
How Will Re-Financing Affect Tax Deductions?
This is another serious consideration for householders who are interested in inquiring the possibility of re-financing. The interest paid on a house loan is often tax deductible. A householder who re-finances in a manner which results in less interest being paid annually may adversely affect their tax scheme. The implications of this type of chance may be amplified for householders 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 householder is allowed to take. This reduced deduction can put the householder in an entirely different income tax bracket and could end up costing the householder money in the long run. For this reason, householders 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.