Refinancing Your Mortgage

General Guidelines

Tradition has it that interest on a new mortgage must be 2% lower than interest on an existing mortgage for refinancing to be favorable. However, do not take the 2% rule as the basis for a final decision. Even if the new mortgage payments are lower, the property must be held long enough to recover closing costs in order to break even.

A complete analysis must include tax bracket, an estimate of the deductible and non-deductible closing costs, repayment penalties (if any) and numerous other factors. It gets even more complicated when two current mortgages exist.

Factors to Consider before Refinancing

• Number of months the property must be retained to “break even” – in other words, if new mortgage payments are less than the old, how many months after adjustment for tax deductions are required to recoup closing costs.
• Amount of new mortgage payment
• Deductible closing costs
• Non-deductible closing costs
• Total principal and interest paid during current mortgage
• Total principal and interest over term of new mortgage
• Amount of interest saved by refinancing
• Additional interest required by refinancing
• Amount to add to payments now to retire mortgage early (compared with cost of refinancing)
• Interest saved by accelerating payments on current mortgage

Some people may find refinancing their mortgages to be a very attractive move. However, like all financial transactions, there is a need for careful analysis, caution, and reflection first, as well as a consultation with your financial planner.