During the process of refinancing, this is a critical question all homeowners should ask themselves. They can either coerce the homeowner to consider refinancing further or convince them to avoid thinking about refinancing for the moment to focus on other aspects of owning a home.
Set Your Financial Goals
Establishing financial goals should be the first step in figuring out if refinancing is worth it. Without it, homeowners cannot find out if refinancing is worth it. Financial goals may vary from one extreme to the other, so it's important to consider if long term savings or increase monthly cash flow is better. This is critical, since refinancing helps to cover both of these objectives. More... / Hide...
Does the Long Run Include Saving Money?
If homeowners want to save money in the long run, they should highly consider refinance mortgages at shorter loan terms and lower interest rates. These both decrease the amount of interest homeowners pay on their loan. Less interest translates to greater cost savings.
Let's say a homeowner owes $100,000 with a loan term of 30 years and a 6.25% interest rate. By lowering the loan term to 15 years, the homeowner can reduce the amount of money going towards interest throughout the duration of the loan. However, monthly payments jump a little higher. Therefore, this refinancing option may be suitable to those with sufficient cash flow to make up for the higher monthly payments.
Is Increasing Monthly Cash Flow Your Goal?
Many homeowners opt to increase their monthly cash flows. For these people, cost savings might not be as high on the list of having more money at the end of each month. Extending loan terms as a refinancing option may be considered for this purpose. This means existing debt is repaid over a longer duration, along with more in interest in the long term. Hence, lower monthly payments and increased cash flow is the result.
How Are Tax Deductions Affected by Refinancing?
Homeowners who are interested in refinancing also have to take this into serious consideration. Tax deductibility is usually assign to all interest paid on home loans. A homeowner who refinances in a way that causes less interest being paid every year may negatively impact their tax strategy. This might cause difficulties for homeowners who laid right below an important tax break line. A decrease in interest paid will lead to a decrease in the tax deduction the homeowner is eligible for. This could add the person into an entirely new tax bracket and could hurt the homeowner's finances. For this reason, homeowners should hire a professional tax specialist to discuss the problems associated with this tax return dilemma before a decision to refinance is made.