March 27, 2009

What Are the Disadvantages of Mortgage Refinancing?

Besides the costs of refinancing, you may want to consider other potential disadvantages before signing on the dotted line. For example, if you cash out some of the equity in your home, you will own less of your home when the deal is done. And it may take you longer to own your home free and clear than if you had not refinanced.

  • Getting a good deal on your refinancing may require you to stay in your house longer than you wanted.
  • Before you refinance, consider calculating how long it will take you to break even.

Take time into consideration

Time is also a consideration when it comes to refinancing costs. How long will it take for your new interest savings to pay off the property appraisal, title insurance, and other costs? You may have to live in the house longer than you planned to make the refinance worthwhile. If you move before you have recouped the refinance costs, you will lose money on the deal.

How long before you break even?

To calculate how long it will take to amortize these costs before you "break even" with your present mortgage, begin by adding up all the refinancing costs. You may want to include the time you would spend in locating necessary documents, calling a few lenders, and completing the application process. Next, call a few lenders to determine current interest rates and your monthly savings in interest with a new loan. Since you are probably deducting your mortgage interest on your income tax, figure your monthly after-tax interest savings by multiplying your new mortgage interest monthly payment by your income tax bracket. For example, if you are in the 24 percent tax bracket, multiply your monthly interest savings by 24 percent to figure the lost tax savings. Then, divide the total refinance costs by your after-tax monthly savings to learn the number of months it will take you to break even with your current mortgage.

An example of breaking even

Number of Months Needed to Break Even with Current Mortgage
What one must pay for materials, services, and other necessities to operate a business, organization, or household.
1. Currency and coins. Cash is also known as legal tender. 2. The currency, coins, bank balances, and (negotiable) money orders and checks that a business owns. 3. Assets that are highly liquid or marketable, with little or no risk of market loss.
1. Total assets minus liabilities. 2. The net worth of a company. 3. The amount of a company one owns according to how much stock he or she has. 4. The value of a property minus its liens.
A charge for using another’s money. Interest is usually stated as a percentage of the amount borrowed and can be charged in a variety of ways, such as accrual, compounding, or simple interest.
An insurance policy that protects a buyer against loss due to prior ownership claims against real property.
The medium of exchange used in trade or commerce.
A loan to buy real estate property, usually secured by the real estate property itself.
A percentage that indicates what borrowed money will cost or savings will earn. An interest rate equals interest earned or charged per year divided by the principal amount, and expressed as a percentage. In the simplest example, a 5% interest rate means that it will cost $5 to borrow $100 for a year, or a person will earn $5 for keeping $100 in a savings account for a year.
Money that has been borrowed from a creditor (lender) by a debtor and that must be repaid. Loans may also be referred to as liabilities.
A tax on the money one makes from labor and/or investments. Income taxes collected by the state and federal governments pay for public programs, defense, and entitlement programs.
Referring to income left after taxes have been withheld.
A payment to federal, state, and/or local governments based on the sales price of a product, on worker income, or on other property and activities.
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