Home Refinancing Considerations
Chances are, a lot has changed since you purchased your current home. Whether that change involves your personal financial situation or market conditions due to the state of the economy, it makes good sense to review your home financing to ensure that your mortgage is still in sync with your financial goals. In many cases refinancing can not only reduce your monthly payments, it can help you maximize tax deductibility1, increase flexibility and build liquidity.
A Merrill Lynch Financial Advisor can help you determine if refinancing is the right strategy for you; and if so, review your refinancing alternatives and help you choose the options that are best for you. Depending on your current mortgage and your financial situation, refinancing may help you:
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- Achieve greater tax-savings by maximizing tax deductibility.1
- Gain more control over your monthly cash flow.
- Build more financial liquidity, which you can use for other purposes. For example, refinancing may be a good idea if you’re planning to purchase a vacation home, pay for a child’s education or make a charitable contribution.
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What to consider
If you are considering refinancing your home, it may be helpful to:
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- Project your annual mortgage payment savings and compare it against an estimate of the cost of refinancing. The costs should include items such as origination fees, attorney's fees, appraisal fees, title fees, and other applicable fees.
- Weigh the estimated cost of refinancing against the potential tax benefits, increased flexibility and liquidity.
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If your mortgage interest is tax-deductible1, you can use the following formula:
(1 - Tax Rate) x Interest Rate= Effective Rate
Example: Assuming you are in the highest bracket with a tax rate of 35% (2010) and your mortgage interest rate is 5.25%, your after-tax cost of your mortgage money is 3.413% [(1-.35) x .0525]. Therefore, every dollar of principal you invest in prepaying your mortgage is earning an effective annual yield of 3.413%. It may be advantageous to explore alternatives to paying mortgage principal.
By refinancing, will I pay off my mortgage faster?
Keep in mind that the desire to pay off a mortgage quickly can be more of an emotional goal than a sound financial strategy. Because a mortgage is an integral part of your overall financial goal, you should determine if paying off your mortgage is consistent with your long-term financial strategy. Your Financial Advisor can help determine whether refinancing suits your particular needs.
What are my options if I choose to refinance?
Depending on your personal situation there are varying refinancing options to consider:
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- Rate and term refinancing is when you refinance your existing loan balance and closing costs where available to obtain a better rate or loan term.
- Cash-out refinancing is when you refinance your existing loan balance and receive additional funds at closing to finance things like paying off consumer debt or making home improvements. (Available for select products.)
- If you have not built the equity in your home to incorporate additional debt into your refinance transaction, you could consider combining a home equity line of credit with your refinanced mortgage. The equity credit line may be available at a special rate and with reduced closing costs when closed in conjunction with a first mortgage.
- If you determined it would not be financially viable to refinance your first mortgage at this time, you may still want to consider refinancing costly consumer credit into a home equity line of credit. This option allows you to take advantage of one of the few remaining tax-advantaged1 sources of consumer credit to reduce your monthly expenses.
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1Merrill Lynch does not provide specific recommendations on tax issues. Consult your tax advisor regarding the deductibility of interest expense. Interest expense may not be deductible for all taxpayers.