Refinance Interest Rates, Consider Your Financial Goals and Tax Deduction Before Refinancing Your Home Loan

Written By: admin on January 4, 2009 3 Comments

With this low refinance interest rates, refinancing home loan seem to be the excellent go. Is it ? That is a question all homeowners should question. Now you see people refinance their home loans here and there. They seem to be getting lower interest rates, paying less monthly installments, and all sort of excellent things a homeowner with a home loan could ever want. You want the same breaks. Same lower rates and smaller monthly installments. But is re-financing always a excellent choice?

Before going further about re-financing your home let’s see another financial aspect of your life: your financial goals.

On deciding whether refinancing your home loan is going to be a excellent go, you should determine your financial goals. Without understanding your financial goals, you won’t be able to answer whether re-financing is excellent for you or not.

Financial goals have two basic branches, if I may place it simply: The Long Term Savings and the Increased Monthly Cash flow. Re-financing usually is able to achieve these two goals anyway.
-If the Long Term Saving is your financial goal, then the refinancing options such as lower interest rates and shorter loan terms is excellent for you. These two options could lower your total amount of interest rates of your loan. Paying less interest will result in a greater cost savings.

Here’s an example: If you have an existing debt of $200,000, with 6,25% interest rate and 20 years of loan term, then reducing your loan term into 15 or 10 years will save you some of the interest during the course of the loan.

The Long Term Saving, which may lead you to shorten your loan period, may have a not-so nice effect of leaving you paying more amount of money every month. This means you will have a significantly lower cash flow. Therefore this type of refinancing is best for those who have enough cash flow to live on despite of the increase in monthly payments.

-If the Increased Monthly Cash Flow is your financial goal, you may reckon of refinancing option that will extend your loan terms. For those who have increased monthly cash flow as their goal, overall cost savings may not be so vital. If you’re one of them, you may want to pay your debt over a longer period of time. In that way, you will have lower monthly installment and increased monthly cash flow, even with a greater interest in the long run.

Another thing to consider before refinancing your home loan: tax deductions

Re-Financing may affect Tax Deductions, since the interest paid on a home loan is often tax deductible. If you want to refinance in a way that result in less interest being paid annually may negatively affect your tax strategy. The effect may be worsened if you’re previously just below a significant tax break line. A major decrease in the amount of interest paid will mean a major decrease in the deduction you’re allowed to take. This reduced deduction may place you in a different tax bracket, even could end up costing you money in the long run.

While this is another serious consideration if you want to reckon about the possibility of refinancing, you might as well reckon of getting a tax preparation professional to determine the consequences re-financing may have upon your tax return.

Summing all it up: choose on the financial goal you want to have, then refinance your home loan according to your goal. But, refinancing could help you reach your financial goal quicker. Second, consider about the tax deduction, as refinancing home loan may affect the tax deduction. Third, if you’re still unsure about how will it affect your tax, go and see a tax prep professional to help. Then you may be well on your way, to pick what’s best refinance interest rates for you and your financial plans. Have a excellent finance-day!