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Home Mortgage Refinance

With interest rates dropping to an all time low in the past few years, many people are probably entertaining the idea of refinancing their higher-rate mortgage. This idea first begun to widespread in mid to late 80’s when interest rates on home loans reached an all time high of 21% in some places. It seemed an easy answer, but the lenders were some bombarded with applicants that it finally had to set a precedent that no one would be approved for a refinance just for a lower interest rate unless the rate had dropped at least five percent from the original mortgage.

When the Internal Revenue Service discontinued allowing homeowners to deduct interest on consumer loans, many homeowners began to look to a home mortgage refinance in order to be allowed to claim that interest on taxes. Is that a wise idea? It depends on the circumstances and what the homeowner hopes to accomplish. It makes more sense to refinance your home to make improvements than to be able to claim the interest on your car and credit cards. After all, your car is financed for perhaps five, six, or seven years, but added to your mortgage, you have actually financed that same car for thirty years, and in the end, you will pay mort interest than you would have by leaving the car or consumer loan as it was.

If you choose a home mortgage refinance to consolidate your debt, you must keep in mind that if you default, you lose your home. The other disadvantage to this is that from an accounting standpoint, it doesn’t make sense. You’re taking a three to five year loan and spreading it over thirty years just for a tax break instead of using that same money to make improvements to your own and increase its value, thereby increasing your net worth. Of course, your payments will be lower, but you will not reap any of the benefits that you would for making tax-deductible improvements to your home with the potential of increasing its value.

A home mortgage refinance is much better utilized to increase the value of the home, and thereby the net worth of the homeowner, instead of a short term purpose such as debt consolidation. Of course, if one is heavily in debt, this may be the only solution, but for the average homeowner, this should be avoided.