Now that interest rates have dropped, they are considering refinancing. They assume they could lower their monthly mortgage payment if they refinance the loan at a lower rate. However, before moving forward, Harry and Pam must first weigh the savings from a lower interest rate against any costs they might incur from refinancing. Closing costs typically include such items as application fees, survey and title update costs, mortgage recording taxes, attorneys' fees, and points. Some closing costs are tax-deductible, while others are not.
Deductible costs provide short-term benefits by easing the net effect of refinancing.
Nondeductible costs are felt in the long run, since they generally increase a property's tax basis and may thus reduce gain upon the sale of the home. It is always wise to shop around for the best deal. However, the lowest interest rate is not necessarily the best, especially if it is offset by high refinancing costs. However, with no closing costs, the couple will feel the benefit immediately. This may be a better deal, especially if the Johnsons expect to remain in their home for only a few years.