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Is Refinancing Worth It?

Refinancing is sometimes a very worthwhile thing to do.

You may think of your house as an investment. Unfortunately, you probably won't see the return on that investment until you're loading up the white Cadillac for the big move to Sarasota. There's a more immediate way you may be able to make some money off your house, though: by refinancing your mortgage.

Refinancing is when you take out a new mortgage on your home, at a lower interest rate, decreasing the amount of your monthly payments. In some creative refinancings, you can actually increase the amount of the loan for such Foolish pursuits as paying down credit card debt or making long-term investments in stocks.

Mortgage interest is tax-deductible, so to calculate the effective yield of a mortgage, multiply the interest rate by your tax bracket. Then subtract that from your interest rate. Investors in a 33% bracket with a 7.5% mortgage interest rate, for example, are effectively paying a 5% mortgage interest rate. (7.5 x .33 = 2.5; 7.5 - 2.5 = 5.0.)

Your first step is to assess the myriad mortgage costs involved -- such as the origination fee, discount points, the appraisal, the credit report, processing, title insurance, and the escrow fee.

Next, check out available loans and interest rates (made easy at websites like bankrate.com). Consider what "points," if any, you might have to pay. A point is equal to 1% of the value of your loan. It's paid up-front when you close the loan.

If you find a rate that is lower than your current rate by one or even half a percentage point, that can result in whopping interest savings over 15 to 30 years, depending on how much you borrow.

For example, $100,000 borrowed at 7% instead of 8% for 30 years will save about $25,000 over the length of the loan. If you invest the extra $69 a month in the S&P 500, at the S&P's historical 11% annual return, in 30 years you would have roughly $180,000.

Fool Community member Reallyalldone pointed out one more detail on this topic on our discussion boards: "For a refinance, points are deductible over the life of the loan, not all in the first year like an original mortgage."

You owe it to yourself to crunch some numbers and see if refinancing makes sense right now.

If you're interested in home-buying and home-owning issues, visit our Home Center, which features lots of money-saving tips and even some special mortgage rates.

And if you're in the market for mortgage insurance, another way to inform yourself about options is to spend some time at the websites of lenders. Here are some major lenders:

  • WellsFargo (NYSE: WFC  )
  • Capital One (NYSE: COF  )
  • WashingtonMutual (NYSE: WM  )
  • Wachovia (NYSE: WB  )
  • Countrywide Financial (NYSE: CFC  )
  • National City (NYSE: NCC  )
  • Bank ofNew York (NYSE: BK  )

National City is anIncome Investorrecommendation. Take the newsletter for a free 30-day trial by clicking here.


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