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Money Management (Distributed by the New Jersey Society of Certified Public Accountants)

Refinancing: It's Not Just About the Interest Rate

Most people refinance their mortgage to take advantage of lower interest rates and reduced monthly payments - but those are not the only reasons to consider trading in an old mortgage for a new one. The New Jersey Society of Certified Public Accountants (NJSCPA) has identified other reasons why refinancing makes sense and offers advice on getting the best deal.

Give Up Your Arm
When rates are high, many homeowners choose adjustable rate mortgages (ARMs) to take advantage of low initial rates. But ARMs come with the risk that interest rates could rise and significantly increase the cost of your loan. By refinancing your ARM with a fixed-rate mortgage, you can lock in a low interest rate and predictable monthly payments for the life of the loan. Although rates have edged up slightly, switching to a fixed-rate mortgage may still be best for you if you plan to stay in your home for a long period.

Borrow Cheaply
If you need a significant amount of cash to pay off high-interest credit card debt, make home improvements, or pay college tuition bills, consider refinancing your mortgage. Cash-out refinancing taps into your equity by refinancing for more than the amount you owe. A word of caution: Don't borrow more than you can pay back or you could lose your home.

Go From 30 to 15
In many cases, refinancing can help you more quickly build equity in your home. Refinancing from a 30-year to a 15-year mortgage, for example, can dramatically cut your overall interest payments and you'll own your home sooner. But remember, you could have higher monthly payments that could make saving harder. Be sure you can live comfortably with the increase.

Dump The "Jumbo"
If, several years ago, you took out a mortgage that was considered a "jumbo mortgage" and paid a higher "nonconforming" mortgage rate, you may be able to refinance your current mortgage into a conforming loan that typically has a lower interest rate. For 2002, $300,700 is the maximum conforming mortgage loan amount for a one-family home. If you borrow more than that, you will need a "jumbo" mortgage. If the jumbo loan you're holding is smaller than that, you may be eligible to refinance to a conforming, lower-rate loan, while also taking advantage of lower interest rates in general.

Shed Private Mortgage Insurance
The higher equity that comes from rising home values is making it possible for some homeowners to get rid of private mortgage insurance (PMI). PMI is required by lenders when the initial down payment on a purchase is less than 20 percent of the purchase price. If your home has appreciated in value, by refinancing, you may be able to do away with the extra expense of PMI insurance.

Bring Them Together
A home equity loan typically comes with a variable rate. If you have a large outstanding balance on your home equity loan and are concerned about rising interest rates, refinancing allows you to consolidate your mortgage and home equity loan into one loan and lock in a lower rate on both. Don't forget that within certain limits you can deduct the interest on home equity loans.

Make It Worth Your While
Whatever your reason for refinancing, it may not be worthwhile if you're planning to move within the next few years. That's because the payoff for refinancing increases the longer you stay in your home. To calculate how long you would need to stay in your home to break even, add the upfront costs of refinancing - fees for application, points, credit reports, title searches, property appraisal - and divide by the monthly savings. The result represents the number of months you need to stay in your current home just to break even. If you plan to move before that period, it probably doesn't make sense to refinance.

Shop, Compare, Negotiate
A refinancing, like a standard mortgage, is a product and shopping around will get you the best deal. Contact several lenders and find out not only the interest rate, but also the fees and terms associated with the loan so you can compare information. Once you know what each lender is offering, negotiate the best deal. There's no harm in asking whether the lender would be willing to waive a fee or agree to lower the number of points or even the interest rate.

Consider Taxes
CPAs say it's important to consider the tax implications of refinancing. Lower rates may result in missed tax benefits. A CPA can help you determine how refinancing your mortgage can affect your overall tax situation.

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Money Management is a weekly column on personal finance distributed by the NJSCPA.

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