Many of us are familiar with the general rule of thumb that proclaims refinancing becomes worth your while if the current interest rate on your mortgage is at least 2 percentage points higher than the prevailing market rate. However, that rule of thumb may be somewhat oversimplified.
For accuracy, be sure to compare apples to apples when considering refinancing.
Specifically, compare the after-tax cost of the new mortgage with the old. Since mortgage interest is deductible, the after-tax cost of the loan equals the principal and interest payment after deducting the taxes saved attributable to the deduction.
Choosing to refinance is not wise for those planning to move in the near future. There is typically not enough time to save with the lower interest mortgage to make up for or to surpass the cost of refinancing.
Most sources say it takes at least three years to fully realize the savings from a lower interest rate, given the costs of the refinancing.
If you take a fixed-rate loan and you refinance identical loan amounts, you can roughly calculate the recovery time by dividing your total refinancing costs by your monthly mortgage payment savings.
This provides you with the number of months you will need to stay in your home to "break even." (example: if you will save $110 per month by refinancing and your refinancing costs total $3,000, divide $3,000 by $110 and the break-even point is 27 months. If you plan to stay in the house longer than 27 months, then refinancing makes sense).
Of course, this article is no substitute for a careful consideration of all of the advantages and disadvantages of refinancing in light of your personal circumstances.
Before implementing a significant tax or financial planning strategy such as this, consider consulting your financial advisor, attorney and/or a tax advisor.
Marc P. Tomberg is branch manager at Raymond James Financial Services. His office is located in Ryanwood Square at 2140 58th Ave, Vero Beach. He may be reached by phone at (772) 778-4399.