Crunching the Numbers
One simple way to decide if it’s beneficial to move ahead with a refinance is by calculating how long you’ll have to stay in your home to recover the closing costs through your lower monthly payment. For example, if your closing costs are $2,500 and the refinance will save you $250 per month, you will recoup your costs after 10 months.
However, the big picture view of refinancing is to look at what you’ll save over time with a lower interest rate. There are many free interest rate calculators available online that will help you tally up the savings in interest expense over time.
Sometimes it just doesn’t pay to refinance. You may want to hold off on refinancing for some very good reasons:
•You’ve had your current mortgage for a long time. By refinancing late in your mortgage, you’ll restart the amortization process, and most of your monthly payment will once again be credited to paying interest and not building equity.
•Your current mortgage has a prepayment penalty.
•You plan to move from your home in the next few years. The savings gained from lower monthly payments may not exceed the costs of refinancing because you won’t have enough time to realize the benefit.
Are You Eligible?
Ultimately, it may come down to whether you’re eligible to refinance. The approval process will be similar to what you experienced with your first mortgage. Your lender will look at your income and assets, credit score, debt ratio, the current value of your property, and the amount you want to borrow. If your credit score has gone up, that may work in your favor for a lower rate.
In the wake of the economic crisis, many homeowners are finding the values of their homes are lower than what they owe on their mortgages. If this is the case, it may be difficult to refinance.
A CPA Can Help
If you’re considering refinancing your current mortgage, work with a CPA. A CPA can help you analyze your current financial situation and determine the best course of action.
If you have questions about your personal financial planning or need help finding someone to assist you, talk to your CPA. To find a CPA in Pennsylvania by location or area of expertise, visit www.ineedacpa.org.
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