Refinancing Your Home Mortgage

A general guideline is to consider refinancing a mortgage when the current mortgage interest rates are at least 2 or more percentage points below what you are paying now.

If you are already a home owner and you need to borrow money, then refinancing your home mortgage could be the cheapest way of borrowing what you need. You might be in a position where you took out a mortgage to buy your home several years ago and there is now a fair amount of equity in the property. Equity is the proportion of your home that you own outright. By refinancing your home mortgage you can free up that money in the form of a lump sum to use on college fees, home improvements or consolidation of debts. Sometimes your current lender will be willing to offer you 100% of your home's current value if you have shown that you pay consistently and are not a likely risk to them. In some cases it is possible for the interest to be tax deductible, which makes this method of borrowing even more attractive; seek the advice of a local professional advisor.

Since mortgage interest remains a deductible expense on federal income taxes, there are guidelines on how the equity can be used to take advantage of the full interest deduction. If the amount of the new mortgage is equal to or below the original price you paid for the house, the full interest deduction will apply. You can also use the equity for home improvements or other allowable expenses such as education, medical expenses, or to cover closing costs of the refinance. Again, consult your local IRS office because there are limitations on how much of the total costs are allowable.

Appraisals are required to determine the value of the home and the loan amount. In some cases, homeowners who look at refinancing find that their homes have increased or decreased in value over time. If the value has decreased, refinancing may not be an option since most lenders will only refinance 80% of the home's current value, and the amount of the original mortgage may exceed this amount. If a lender does refinance more than 80% of the home's current value, the lender will require mortgage insurance, which will increase the closing costs and the monthly mortgage payment.