Purchasing and financing a home is a major financial undertaking filled with complexity and tough decisions. As the saying goes, it is one of the most important financial decisions you will make in your life. The money you pay over the life of a loan is significant, and small variables can have huge outcomes over time.

That said, your home's financing isn't final. The decisions you made in the past were based on an idea of how things might play out in your future. However, your income, the mortgage market and the real estate market can change. This is why you should always assess the applicability of your mortgage to your current situation and future plans to determine if a refinance is in order.

In fact, there are a variety of reasons you might want to refinance:

• You want to take advantage of a lower interest rate. Rates recently hit historic lows, allowing many homeowners to get locked in at a lower rate -- but rates are slowly beginning to trend back upwards. If you can get in now before they bounce back any higher, you can keep your monthly payments low and could even hold down the overall cost of your loan over the long haul.
• Your current loan is an adjustable-rate mortgage. It could be your current loan is an ARM that will soon adjust upwards. Or, you might prefer the peace of mind offered by a fixed-rate mortgage.
• You need to get some cash. You could have credit card debt or another large expense that you wish to pay off. If this is the case, you might want to refinance and "cash out" a certain amount to cover this expense. In fact, cashing out a certain amount at a mortgage's much lower rate to pay off a debt -- say, a credit card -- at a much higher rate often makes solid financial sense.
• You might desire better terms. For instance, your current loan might be a 30-year, but you now find yourself in a financial position that lets you pay it off in 15 years. Opting for the shorter term loan will help you pay off your debt sooner and save significant money over the term of the loan. Likewise, you might find yourself in a position where your income has decreased and you wish to extend the term of the loan.
• You have private mortgage insurance. PMI is required of borrowers who put down less than 20 percent on their home, and can cost anywhere from .25 percent to .75 percent of the loan value. In general, if you have a 22 percent equity position in your home, you will likely be able to remove your PMI, but be sure to check your state regulations as they vary widely. Look at comparable houses for sale in your neighborhood to help you gauge whether your equity has risen.
• You want to consolidate your second mortgage into all one loan with a refinance. Again, this could mean significant savings for you over the long haul.

Important Considerations

Whatever your reasons for wanting to refinance, there are a number of factors you'll want to consider. For starters, you want to make sure that your current loan does not have a pre-payment penalty for refinancing. Such a penalty says that you cannot pay off your loan too early. If you have one in place, you'll want to make sure you are outside that penalty phase (these typically last between one and five years).

Another key concern is whether or not the costs of a refinance are recouped by your lower rate. All loans have closing costs associated with them, and you want to make sure that whatever savings your new loan delivers will also be worth the closing costs. Typically, you want the savings you gain over the life of the new loan to recoup your closing costs within two years.

Compare the overall cost of the new loan to the cost of the old loan. Take the remaining months of your existing loan and multiply them by your principal and interest payments and compare that product to the same calculation for the new loan. Is it lower? Is it higher? How large is the difference? Obviously the goal is for the overall cost of the new loan to ring in at less than that of old loan, but if a cash-out is involved, you'll need to account for that.

Factor in the tax deductions of the new loan in comparison to the old. Are they larger or smaller? By how much? The write-off for mortgage insurance means a lot to most households, so you want to make sure that the money you save on your mortgage won't be undermined by a less advantageous tax position.*

You also can make a deduction for any points you purchase, but there is a difference between how points are deducted in a refinance as opposed to a home purchase. Any points that you pay on the loan for a purchase are deducted for the tax year in which you secured the loan. However, in the case of a refinance, that deduction is amortized over the term of the loan. You'll want to make sure your calculations reflect that.

As you can see, there is a lot to consider, which is why it makes sense to sit down with a home financing expert and review all the key considerations and do all the necessary calculations to ensure you're making the smartest financial decision you can.

Are you considering refinancing your home loan? If so, I would love to help you make the most informed decision possible. Please contact me today!

*WJB is not a tax advisory firm. The information contained in this article is for informational purposes only and may not reflect current tax year rules and regulations. Consult your tax advisor or the IRS for current tax year rules, restrictions and regulations.