Is This a Good Time to Refinance?

June 14, 2009

Interest rates often fall during tough economic times. That’s good news for homeowners who would like to shave a few dollars off their monthly mortgage payments. When interest rates fall, it’s time to consider refinancing your mortgage loan. If you can find a loan with a lower interest rate, your regular payments will drop. However, refinancing is only a good idea under the right circumstances. The Virginia Society of CPAs offers some advice on deciding whether the time is right.

Know how much it will cost

When you refinance, you take out a new, cheaper loan and use the proceeds to pay off your old mortgage. Whenever you borrow money, there will be costs involved. These might include points — or a percentage of the loan amount — that you will have to pay the bank or other mortgage holder, as well as attorney costs and other fees. Do your homework to find out what the fees will be. Next, figure out how much you will save each month by refinancing. Given the loan fees and what you might save, does the refinancing still seem like a good deal?

Consider your long-term plans

One of the ways to determine whether the refinancing is appealing is to consider how long you plan to stay in your current home. The refinancing must not only pay for itself, but also provide some savings to you in order to be worthwhile. For example, say the closing costs on your loan will amount to $2,400, and the new mortgage will lower your monthly costs by $200 a month. That means it will be one year — or 12 months x $200 — before the loan pays for itself. After that point, you will begin to benefit from your monthly savings.

Be cautious about extensions

In some cases, you can lower your mortgage costs by extending the term of your loan, but you may end up with a short-term gain and a long-term loss. It’s true that if you have 20 years left to pay on a $200,000 mortgage, you can lower your monthly payments by taking out a new 30-year loan, even if your interest rate stays the same. However, while you will have more money in your pocket now, you will actually lose money over time. That’s because you will be paying interest over a longer term, which pushes up the total cost of the loan to you. 

Check out free resources

If you’re uncertain about how much a refinanced mortgage will cost you, turn to the free online resources for information. You can find many resources to help you understand a variety of financial issues as well as handy mortgage calculators that you can use to consider different rates and loan terms.

Consult a CPA

Whenever you have concerns about the best way to handle your home financing decisions, be sure to turn to your local CPA. Your CPA can provide answers to the financial questions facing you and your family.

The Virginia Society of Certified Public Accountants (VSCPA) is the leading professional association dedicated to enhancing the success of CPAs. Founded in 1909, the VSCPA has 8,700 members who work in public accounting, industry, government and education. The VSCPA is celebrating its Centennial anniversary this year — 100 years of an organized CPA profession and a strong organization uniting and representing CPAs across the Commonwealth. Visit www.vscpa.com/Centennial to learn more about the VSCPA’s Centennial Celebration. For general information, please visit the Press Room on the VSCPA website at /, e-mail vscpa@vscpa.com or call (800) 733-8272. To search for a CPA in your geographic region, visit http://www.financialfitness.org/ and click on “Find a CPA.”

© 2009 American Institute of Certified Public Accountants