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Refinancing Your Mortgage

If you've ever had the pleasure of refinancing your mortgage you've learned that there's nothing fun about it. Mountains of paperwork to fill out and numerous lender fees make it a laborious and costly process. But there are times when refinancing a mortgage is a smart move.

With interest rates hovering around historical lows in recent years, thousands of homeowners have refinanced their mortgage in order to cut their monthly payment. Replacing your old mortgage with one the offers a lower interest rate can save you hundreds of dollars per month.

You may also want to consider refinancing your mortgage if you have an adjustable rate mortgage and interest rates are expected to rise in the coming years. Locking in a lower rate with a fixed rate mortgage will keep you sleeping sound no matter how high rates may sail.

If you financed your home via a balloon mortgage, you will be forced to either refinance it or move before the balloon payment comes due.

Some people refinance their mortgages so they can pull more cash out of it. Instead of just refinancing for the amount they currently owe, they pull out additional funds to use for home improvement projects, putting their kids through school, or starting a new business.

Of course, refinancing a mortgage is not free. While your lender may give you a break on some charges, there will still be several thousand dollars in fees to pay. You must factor these closing costs in when deciding whether or not to refinance, as it will take some time before the lower monthly payments make up for the added cost of the closing fees.

How long it takes to start saving money depends on how long you stay in the home after refinancing and the size of the spread between the old rate and the new rate. The longer you stay and the bigger the spread, the quicker you save.

For example, let's say your current mortgage is $1,600 per month. If you refinance, your new payment will be $1,300. That's a savings of $300.

But you must keep in mind that by lowering your interest payment you are also lowering the amount you can deduct on your tax return. You have to reduce your monthly savings by the amount you lose in tax write-offs.

For example, if you are in the 25 percent tax bracket, your savings would be reduced by $75 ($300 X 25% = $75). This means you would save $225 per month instead of $300.

Now to figure out how long it will take you to breakeven simply divide the closing costs by the amount of monthly savings. So if the closing costs were $4,800:

$4,800 / $225 = 21.3 months.

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