Wednesday, June 6, 2007

Your Personal Income Taxes

With a lower interest rate on your home loan, you will have less interest to deduct on your income tax return. That, of course, may increase your tax payments and decrease the total savings you might obtain from a new, lower-interest mortgage.

You should be aware of an Internal Revenue Service (IRS) ruling with respect to points paid solely for refinancing your home mortgage. IRS regulations require that interest (points) paid up front for refinancing must be deducted over the life of the loan, not in the year you refinance, unless the loan is for home improvements. This means that if you paid a certain number of points, you would have to spread the tax deduction for those points over the life of the loan. If, however, the loan or a portion of the loan is for home improvements, you may be able to deduct the points or a portion of the points. Check with the IRS regarding the current rulings on refinancing, particularly if you are using the new loan to make home improvements.

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Consider Other Mortgage Programs

If you are thinking about refinancing your mortgage, you might want to consider other types of mortgages. For example, you might want to look into a 15-year fixed rate mortgage. In this plan, your mortgage payments are somewhat higher than a longer-term loan, but you pay substantially less interest over the life of the loan and build equity more quickly. (Of course, this also means you have less interest to deduct on your income tax return.)

You also might want to consider refinancing if you have an adjustable rate mortgage with high or no limits on interest rate increases. You might want to switch to a fixed rate mortgage or to an adjustable rate mortgage that limits changes in the rate at each adjustment date as well as over the life of the loan.

If you decide to apply for refinancing with a particular mortgage company, and if you do not want to let the interest rate "float" until closing, get a written statement to guarantee the interest rate and the number of discount points that you will pay at closing. This binding commitment or "lock in" ensures that the mortgage company will not raise these costs even if rates increase before you settle on the new loan. You also may consider requesting an agreement where the interest rate can decrease but not increase before closing. If you cannot get the mortgage company to put this information in writing, you may wish to choose one that will provide this important information.

Most companies place a limit on the length of time (say, 60 days) they will guarantee the interest rate. You must sign the loan during that time or lose the benefit of that particular rate. Because many people refinance their mortgages when rates decline, there may be a delay in processing the papers. Therefore, you may want to contact the company periodically to check on the progress of your loan approval and to see if additional information is needed.


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Deciding to Refinance

Traditionally, the decision on whether or not to refinance has meant balancing the savings of a lower monthly payment against the costs of refinancing. But in recent years, companies have introduced "no cost" and low cost refinancing packages that minimize or completely eliminate the out-of-pocket expenses of refinancing. (These refinancing packages compensate with a higher interest rate, or by including some of the costs in the amount that is financed.)

With traditional refinancing, the most often cited rule of thumb is that the interest rate for your new mortgage must be about 2 percentage points below the rate of your current mortgage for refinancing to make sense. However, with the newer low and no cost refinancing programs, it can be worth your while to refinance to obtain a smaller reduction in interest rates.

How long you expect to stay in your home is also a factor to consider. If you'll be moving in a few years, the month to month savings may never add up to the costs that are involved in a refinancing.

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Smart Mortgage Refinancing

Smart borrowing could save you thousands of dollars, but if you aren't careful, new loan could cost you much more than you expected, so don't be lazy to examine all available options and offers from different lending institutions.

More and more borrowers are recently aware of mortgage refinancing benefits in certain situations. One of the main factors that had a great impact on growing number of refinancing application is significant decrement of interest rates at the beginning of 21st century. Interest rates are know climbing up again in the last 2 years, but boom in number of borrowers interested in refinancing their existing mortgage loan is still continued.

There is a lot of reasons why so many today's borrowers are seriously consider this option. Savings that new loan could bring you could be significant if current interest rates are lower than rate on your existing loan, or if your adjustable rate mortgage is set to adjust upwards soon.

Another reason why so many people apply for refinancing process is getting some fresh cash from equity build in home, that can be used for any purpose, usually for some major expenses like children education or some home improvements. The list of reasons for cash-out refinancing is never-ending, everyone has a very good reason to get some fresh cash in their hands, but it is a great decision so every borrower must carefully examine advantages and all possible negative aspects before signing new mortgage contract.

When calculating whether it pays to refinance existing mortgage loan or not, you have to compare the savings that new term will produce or money that will remain in your pocket when cash-out refinancing with all the loan related fees and possible prepayment penalty on your current mortgage. If you are refinancing to get some fresh cash, considerable option is also home equity loan which is in some situations cheaper option.

Smart borrowing could save you thousands of dollars, but if you aren't careful, new loan could cost you much more than you expected, so don't be lazy to examine all available options and offers from different lending institutions.

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