April 22, 2021 | Posted in:

Look Beyond the Interest Rate Before you Refinance

The past year has had record-low interest rates. However, when you’re thinking of refinancing your home mortgage, simply comparing interest rates is not enough. Here are some other factors to consider before you refinance.

Compare apples to apples. Always request a good-faith estimate from any lender. This report should disclose all the fees and closing costs, such as points, credit report fees, inspection fees, private mortgage insurance, and appraisal fees.

Use this information to evaluate competing loan proposals.

  • Calculate your breakeven period.

    This is the length of time it takes you to recover the costs a lender typically charges to refinance your mortgage. To do this, divide your closing costs by your monthly savings (your current loan payment minus your new loan payment). If you plan on selling your home in the near future, refinancing may not save you money because it usually takes several years to recover your closing costs through a lower monthly payment.

  • Read the loan agreement.

    Before you pay off your existing mortgage, check your loan for an early payment penalty clause. In addition, make sure you read and understand the terms of your new loan. For example, watch for restrictions against renting out your property without your lender’s consent.

  • Evaluate the risks of debt consolidation.

    When you refinance, it may be tempting to consolidate high-interest personal debts into a single lower-interest home loan. Securing a consolidation loan with your home may turn your interest into a tax deduction, but be aware of the risks as well. If you can’t make the payments, you could lose your home.

Are mortgage refinancing costs deductible?

If you refinanced to consolidate your debts or to obtain a lower interest rate, you must amortize (write off) the points over the term of your loan. However, to the extent you used the loan proceeds to make improvements to your home, you can write off that portion of points this year.

If you’ve been amortizing points on a previous mortgage, you can write off the remaining balance of points in the year the loan is paid off.

Contact us

Major financial decisions should always be run by your trusted CPA, and that includes a mortgage refinance. Whether refinancing makes sense in your particular situation depends upon a number of factors. Call an Alloy Silverstein CPA if you would like a review of your situation. This extra step can help you select the loan that best fits your needs.


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