When trying to decide if refinancing will be beneficial for you, first consider whether your primary objective is to lower your monthly payment or to lower your total interest amount by shortening the term of the loan. If your goal is to lower your monthly payment amount and ease your cash-flow situation, an important consideration is the length of time it will take you to recoup the additional closing costs you incur to refinance the mortgage. To find the number of months that will pass before refinancing starts paying off, simply divide your monthly savings Into your closing costs. However, if your prime objective is to exchange your mortgage for one with a shorter term, your first concern should be whether you can cover the additional cash outlay each month. Taxes may also play a part in your decision.
Interest paid on a refinanced mortgage is tax-deductible.
Points are likewise deductible, but unless you use a portion of the loan for home improvements, you must deduct this amount equally over the life of the loan. Note that when refinancing lowers your interest payments, your tax deduction also decreases. No matter what your refinancing goals, some experts suggest it is advantageous only if the new mortgage's interest rate is at least two points lower than your current mortgage, and you plan to stay in your house a minimum of two more years. This rule of thumb is a good way to begin your exploration of refinancing, but CPAs advise that you do the actual calculations to ensure that refinancing is a smart move for you. By paying extra principal each month, you build up equity faster and reduce the amount of interest you pay over the life of the loan.