Home Refinancing Considerations

Maximize tax deductibility¹, increase flexibility, build liquidity.

Is a refinancing solution right for me?

Have you considered restructuring your mortgage to maximize tax deductibility?¹ Perhaps you would like more flexibility to control your monthly cash flow? Would you like to build liquidity as a result of lowering your monthly mortgage payment? Are you planning to purchase a vacation home, make a luxury purchase, or establish a charitable foundation? To help determine if refinancing makes sense financially, you should:

• Project your annual mortgage payment savings and compare it against an estimate of the cost of refinancing. The costs should include items such as origination fees, attorney's fees, appraisal fees, title fees, and other applicable fees.
• Weigh the estimated cost of refinancing against the potential tax benefits, increased flexibility and liquidity.

By refinancing, will I pay off my mortgage faster?

The desire to pay off a mortgage quickly can be more of an emotional goal than a sound financial strategy. Because a mortgage is an integral part of your overall financial goal, you should determine if paying off your mortgage, relative to your overall financial strategy, is a viable strategy.

If your mortgage interest is tax-deductible¹, you can use the following formula:

(1 - Tax Rate) x Interest Rate = Effective Rate

Assuming you are in the highest bracket with a tax rate of 35% (2005) and your mortgage interest rate is 6.5%, your after-tax cost of your mortgage money is 4.22% [(1-.35) x .065]. Therefore, every dollar of principal you invest in prepaying your mortgage is earning an effective annual yield of 4.22%. It may be advantageous to explore alternatives to paying mortgage principal .²

What are my options if I choose to refinance?

Depending on your personal situation there are varying refinancing options to consider.

Rate and term refinancing is when you refinance your existing loan balance and closing costs where available to obtain a better rate or loan term.

Cash-out refinancing is when you refinance your existing loan balance and receive additional funds at closing to finance things like paying off consumer debt or making home improvements.

If you have not built the equity in your home to incorporate additional debt into your refinance transaction, you could consider combining a home equity line of credit with your refinanced mortgage. The equity credit line may be available at a special rate and with reduced closing costs when closed in conjunction with a first mortgage.

If you determined it would not be financially viable to refinance your first mortgage at this time, you may still want to consider refinancing costly consumer credit into a home equity line of credit. This option allows you to take advantage of one of the few remaining tax advantaged¹ sources of consumer credit to reduce your monthly expenses.

¹ Merrill Lynch does not provide specific recommendations on tax issues. Consult your tax advisor regarding the deductibility of interest expense. Interest expense may not be deductible for all taxpayers.