With interest rates reaching an all-time low, the question of whether or not to refinance your home comes into existence. Depending on your circumstances, refinancing could or could not put you ahead financially. In general, mortgage interest is deducted on Schedule A, Form 1040. This is limited to a mortgage of $1million dollars at any time. On the other hand, if the debt is a home equity debt there is a $100,000 limitation.

Refinancing your home makes sense if:

1. Your credit score has improved and you can get a better rate on your mortgage.
2. Interest rates has gone done in general. Getting a mortgage with low interest rates allows you to pay your debt/ build equity faster.
3. You refinance to adjust the terms. Getting a mortgage with a shorter term may mean lower interest rates and paying your debt off faster. When you reduce the terms of your mortgage, your monthly payment goes up. Therefore, if cash flow is an issue you may want to reconsider.
4. You have an adjustable rate mortgage and want to switch to a fixed rate mortgage.
5. If the equity in the home exceeds the debt, refinancing may be an option to get cash out for other investment purposes.

How to compute the cost of refinancing

The cost of refinancing should be computed over the number of years the taxpayer intends to own the home. The total interest paid on the current rate should be compared with the total interest paid on the new rate. Moreover, the cost of refinancing and effect of interest deductions should be taken into consideration.

Here is an example of how to compute refinancing savings. You can find refinance calculators like this one using excel templates or doing a search online.

As always, contact your CPA for more personable advice.