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What Can DCU Save You?

Why and When Should You Refinance

Homebuying and Mortgages

Homebuying
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Why and when should you refinance

Why would you refinance?

Refinancing is when you pay off your existing mortgage with a brand new mortgage. The common reasons to refinance are...

  • To lower your payment – Refinancing at a longer term or a lower interest rate can reduce your monthly payment. The first may increase the total cost of interest over the life of the loan. A lower interest rate on the same term may reduce it.

  • To pay off faster – Refinancing a 30-year loan at 15 years can reduce your overall interest costs, though payments are often higher. Refinancing to a biweekly mortgage can have the same effect.

  • To reduce interest – If you have sufficient equity, consolidating higher interest loans into your mortgage can lower your overall cost of debt and may allow you to deduct interest on your taxes.

  • To change rate types – Depending on your situation, you may want to switch from an adjustable-rate mortgage to a fixed-rate or vice versa.

When refinancing may not make sense

  • If you'll be moving soon – If you'll be paying points and closing costs to get a better rate, the interest rate savings over your remaining time in the home should be equal or greater than the closing costs or you haven't saved anything. If you look at the money you might have earned placing the point and closing cost money in a savings account over that time, the threshold is even higher for it to be worthwhile.

  • If you're already several years into your mortgage – Once you are halfway through your mortgage, you've really started to pay down the loan principal. When you refinance, your payments will be mostly interest again. As a result, your payments may be lower, but you could pay more interest over the life of the loan.

    However, refinancing could be beneficial if you do not extend the loan by doing so. For example, if you have 10 years left on a 30-year loan and you refinance for 10 years or less, refinancing may save you money depending on the interest rate, fees, and closing costs.

  • If refinancing extends your mortgage past retirement age – If you haven't planned for house payments after retirement, you may want to either skip refinancing or make sure your new term does not extend past your original pay off date.

Special tax treatment for refinancing

When you purchase a home, you can generally deduct points as mortgage interest in the tax year you buy your home. Any points you pay on a refinance, though, must be amortized over the life of the loan. In other words, if you pay $1,500 in points on a 15-year refinance, you can deduct $100 in points every year until the loan's paid off.

If you pay off a refinanced mortgage early, you can deduct the rest of the points in the year you pay off the loan. Many homeowners forget to take that final deduction.

Let us help you determine what's best for you

DCU can help you determine if refinancing makes sense for you. We can take into consideration all the factors and your preferences and let you make the decision. If refinancing will actually increase your loan costs, we will tell you.

A large part of getting the right mortgage is understanding numbers and costs. DCU offers easy-to-use online calculators to help you figure budgets, payments, and more from the comfort of your home. Simply plug in your numbers, and the calculators do all the work! To find out which refinancing option is best for you, check out our Loan Payment Calculator.