About Mortgage Refinancing

Mortgage refinancing generally refers to the process of taking out a new home mortgage loan and using some or all of the proceeds to pay off an existing mortgage (or mortgages) on the property. No-cash-out refinancing occurs when the amount of your new loan doesn't exceed your current mortgage debt (plus points and closing costs). With this type of refinancing, you may be able to borrow as much as 95 percent of your home's appraised value.

Refinancing can often save you money over the life of your mortgage loan. However, this savings comes at a price. Typically, you'll need to pay an assortment of up-front fees, including points and closing costs.

Some lenders often advertise "no points, no closing costs" refinancing deals, which roll the costs into your overall loan balance or charge a higher interest rate. However, a good interest rate and low fees aren't the only factors to consider.

You'll also want to make sure you are satisfied with your current mortgage lender before refinancing elsewhere.

Are there any tax issues to consider?

For federal income tax purposes, you are generally able to deduct qualified interest you pay on a mortgage to buy, build, or improve your home, provided that the mortgage is secured by your home and meets certain dollar limits.

This is known as "home acquisition indebtedness" for tax purposes. Interest on new debt you incur to refinance your home acquisition indebtedness also qualifies, but only up to the amount of the refinanced debt.

Reasons to refinance:

1. You may want to lower your monthly mortgage payment by refinancing to a lower interest rate
2. You may be interested in refinancing to a lesser loan term (e.g., from a 30-year mortgage to a 15-year mortgage), allowing you to own your home free and clear in less time
3. You may be looking to do a cash-out refinancing or tap into your home equity in order to access some extra cash for home improvements, pay for college, or consolidate debt
4. You may want to refinance your adjustable rate mortgage (ARM) to a fixed rate mortgage or a new ARM with better terms
5. Tip: If you are refinancing because you want to tap into your home equity, you may want to consider other options, such as obtaining a home equity loan or opening a home equity line of credit.

When should you refinance?

An old rule of thumb said that you shouldn't refinance unless interest rates are at least 2 percent lower than the interest rate on your current mortgage. However, even a 1 to 1.5 percent differential may be worthwhile to some homeowners.

Actually, a number of factors enter into the decision of when to refinance. The length of time you plan to stay in your current home, the costs associated with getting the new loan, and the amount of equity you have in your home must all be considered.

Ultimately, it makes sense to refinance if you're certain that you'll be able to recoup the cost of refinancing during the time you own the home. So, it's important to do the math ahead of time and calculate your break-even point (the point at which you'll begin to save money after paying fees or closing costs). It is often considered ideal if you can recover your refinancing costs within one year or less.

Some typical closing costs include:

• Application fee
• Appraisal fee
• Credit report fee
• Attorney/legal fees
• Loan origination fee
• Survey costs
• Taxes
• Title search
• Title insurance

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