While the recent coronavirus fears are sending shockwaves throughout the stock market, bond rates have been improving. According to Mortgage News Daily, current rates for 30-year mortgages are 3.34% nationally (rates posted online as of February 24th – Bit.ly/2VWD4Gq). While you may have a low rate on your current mortgage, you may want to consider evaluating your refinance options to lock in potentially lower rates.
How do you know if a refinance makes sense? Keep in mind that there isn’t a set amount that rates should decrease before you refinance. Someone with a $200,000 mortgage might need to see rates drop a lot more than someone with a $600,000 mortgage. The costs to refinance either mortgage might be relatively similar, but even a small interest rate decrease for the $600,000 mortgage could create enough long-term savings to make a refinance worthwhile. The person with a $200,000 mortgage might need to wait for rates to drop a little more before considering a change.
What type and term of loan should you choose? If you decide to refinance, you’ll have the option of selecting an ARM (adjustable rate mortgage) or permanent loan and the length of the loan. With an ARM, you have a certain amount of time (often five, seven, or ten years) with a locked-in, lower interest rate. After the locked-in period ends, the rate then resets annually for the balance of the 30-year term. With a permanent loan, you’re paying the same rate and monthly payment for the entire loan term.
We often recommend that our clients go with the 30-year unless their current loan has 20 years or less remaining. This is due to the size of their monthly mortgage obligation and is especially true when interest rates on 15 and 30-year loans are comparable. You can pay down a 30-year loan faster by making larger payments, but you can’t scale back your payments on a 15-year mortgage if you go through a financial crisis (disability, divorce, loss of employment, etc).
If you currently have an ARM, this could be a great time to refinance your mortgage into a fixed rate for the entire term of your loan. While an ARM could have a slightly better rate right now, you could find it reassuring to know that you’re locked into a fixed rate for the next 30 years.
What else should you consider? While rates may be low, refinancing isn’t for everyone. Make sure that you’re carefully evaluating what makes sense for you. First, as you compare rates, make sure you’re focused on APR not the “rate.” The interest rate only shows the base rate that you’re paying for the loan and is a less accurate measurement of your total cost. APR is the annual percentage rate and factors in some of the costs for the loan, giving you a more complete picture of your total loan cost.
Second, you’re likely extending the term of your mortgage when you refinance. You may have already made five or more years’ worth of payments on your mortgage; spreading the balance of your mortgage over a new 30-year time frame may cost you. Even if you reduce your monthly payments today, you might be increasing the total interest that you’ll pay over the life of your loan.
Third, determine how long you plan to stay at your current residence. If you plan to move in a few years, the cost to refinance may outweigh the benefit of obtaining a lower interest rate. Homeowners are estimated to live in their homes for about 13 years (Bit.ly/39DoUOv), so you might spend less time in your house than you expect.
Fourth, the new tax laws limit deducting interest on new mortgages over $750,000. If you have an existing mortgage with a balance over $750,000, you’re currently still able to deduct all the interest as your loan is grandfathered in through 2025. A refinance could save you in interest payments but cost you on your taxes. Make sure to consult your tax advisor before committing to a refinance.
Talk with your financial advisor, tax advisor, and mortgage professional to help determine if refinancing your mortgage is best for you
- Throughout my nearly 20 years as a Financial Advisor, I have seen some of the best and worst markets in our history. That experience allows me to approach my clients with the knowledge of how the markets fit into their greater financial picture. At Partnership Wealth Management we help everyday people who have accumulated wealth make sense of what they have and work with them to maximize their financial opportunities in a relaxed, comfortable, and professional environment. While we help people from all walks of life, many of our clients are same-sex couples searching for a knowledgeable, LGBT-friendly financial advisor to help them with their unique financial planning needs. I am a CERTIFIED FINANCIAL PLANNER™ professional and have the Accredited Domestic Partnership Advisor(sm) designation. As a Registered Investment Advisor, we are not tied to any company’s investment products allowing us to provide unbiased advice by offering a wide array of investments and other products to our clients. Since 2001, I have been writing articles on financial planning for several regional newspapers and have been a guest speaker on LGBT financial issues for various local and national organizations. Additionally, I have conducted financial planning workshops for large corporations and government agencies. Non-Profit Work I believe that it is important to give back to the community and currently serve as the treasurer for FreeState Justice and as a co-founder/president of Paws for a Cause. I’m a current member of several LBGT, environmental, and local community groups. Personal My wife, Heidi and I enjoy camping, hiking, and traveling with our daughter, Elise, and our dogs, Fenway & Roxy. Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.