Refinancing your Home?

Beware of exorbitant closing costs!

Many clients think all of their closing costs on purchasing homes or refinancing are deductible on their tax returns.

FACT:  Only prepaid interest such as loan origination fees and discount points are deductible.  They are fully deductible on a new home purchase and must be pro-rated over the term of the loan for a refinance.  Over 30 years, this doesn't add up to much!  The rest of your closing costs are included in the cost basis of your home for capital gains purposes.  However, this doesn't really matter since you can make up to $500k on the sale of your home and not pay any capital gains tax if you have lived in it for two years (Married/Joint).

I've seen several clients' closing cost paperwork over the years with some costs over $7500 to refinance on 30 year loans.  A good target is $2500 or less!

Do you realize how many years it takes to pay off these fees on a 30 year loan?  You would be better off not refinancing in the long run!

Example:  $150K for 30 years at 5% = $805 principal and interest.  $157,500 loan for 30 years at 5% = $845 principal and interest.

You will be paying $40 more per month for 30 years  and that equals $14,400.  You will pay an extra $7000 in interest on the closing costs!!!

This equates to 1/2% in the overall interest rate.  If you refinanced for 1/2 percent less, it would do you absolutely no good!

Here are some things to watch for -

Some lenders do your paperwork and sell your loan to a mortgage company or bank.  They tack on a broker fee to your closing costs that could be excessive!   

Comparison shop several mortgage brokers, credit unions and banks before you sign, especially if you have a good credit rating.  They always provide you a good-faith estimate.  Check around, it could save you thousands of dollars!