Besides the costs of refinancing, you may want to consider other potential disadvantages before signing on the dotted line. For example, if you cash out some of the equity in your home, you will own less of your home when the deal is done. And it may take you longer to own your home free and clear than if you had not refinanced.
Time is also a consideration when it comes to refinancing costs. How long will it take for your new interest savings to pay off the property appraisal, title insurance, and other costs? You may have to live in the house longer than you planned to make the refinance worthwhile. If you move before you have recouped the refinance costs, you will lose money on the deal.
To calculate how long it will take to amortize these costs before you "break even" with your present mortgage, begin by adding up all the refinancing costs. You may want to include the time you would spend in locating necessary documents, calling a few lenders, and completing the application process. Next, call a few lenders to determine current interest rates and your monthly savings in interest with a new loan. Since you are probably deducting your mortgage interest on your income tax, figure your monthly after-tax interest savings by multiplying your new mortgage interest monthly payment by your income tax bracket. For example, if you are in the 28 percent tax bracket, multiply your monthly interest savings by 28 percent to figure the lost tax savings. Then, divide the total refinance costs by your after-tax monthly savings to learn the number of months it will take you to break even with your current mortgage.
Here is an example:
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