This is a very significant question which all homeowners should ask themselves
both at the start and towards the end of the progression of re-financing. The
answer to this question can spur the homeowner to investigate re-financing
further or convince the homeowner to table the thoughts of re-financing for the
moment and concentrate on other aspect of owning a home.
Establish Financial Goals
This should be the first step in the progression of settling on whether or not
re-financing is worthwhile. Without this step, a homeowner cannot accurate
answer the question of the worth of re-financing because the homeowner may not
fully understand his own financial goals. While financial goals may run the
gamut from one extreme to another the most basic question to ask is whether the
more significant goal is long term savings or increased monthly cash flow. This
is important because re-financing can usually achieve these two goals.
Do You Want to Save Money in the Long Run?
Homeowners who institute a goal of saving money in the long run should
deliberate about re-financing options such as lower interest rates or shorter
loan terms. Both of these options can considerably lower the amount of interest
the homeowner is paying on the loan. This is significant because paying less
interest will result in a greater cost savings.
Think about an example where a homeowner has an previous debt of $100,000, an
interest rate of 6.25% and a loan term of 30 years. Just by reducing the loan
term to 15 years the homeowner can significantly decrease the amount which is
paid in interest during the course of the loan. However, this option will also
result in an increase in the monthly payments made by the homeowner. Therefore
this type of re-financing option may only be available to those who have enough
cash flow to compensate for the increase in monthly payments.
Do You Want to Increase Your Monthly Cash Flow?
Some homeowners may have a chosen goal of enlarging their monthly cash flow. For
these homeowners the overall cost savings may not be as important as having more
money available to them each month. These homeowners might consider a
re-financing option in which they are able to extend their loan terms. This
means they will be repaying the existing debt over a longer period of time. The
homeowner will pay more in interest in the long run but will achieve their goal
of lower monthly payments and an increased cash flow.
How Will Re-Financing Affect Tax Deductions?
This is an added serious deliberation for homeowners who are interested in
investigating the possibility of re-financing. The interest paid on a home loan
is often tax deductible. A homeowner who re-finances in a manner which results
in less interest being paid annually may adversely affect their tax strategy.
The implications of this type of chance can be amplified for homeowners who were
previously just below a significant tax break line. A significant decrease in
the amount of interest paid will mean a significant decrease in the deduction
the homeowner is allowed to take. This reduced deduction can put the homeowner
in an entirely different tax bracket and could end up costing the homeowner
money in the long run. For this reason, homeowners who are considering
re-financing should have a tax preparation professional determine the
ramifications re-financing will have on their tax return before a decision is
made.
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