Mortgage Rates Are Down, Time To Refinance?
Mortgage rates are the lowest they have been since 2016 and applications to refinance are up. The national average for a 30 year fixed mortgage has fallen to 3.6% as of August 14, 2019, down almost 1% from the average rate of 4.54% in 2018. A good rule of thumb – refinancing makes sense if rates are at least ½% to 1% lower than your current rate. If your current rate is more than 4.375%, and it likely is if you purchased your house in the last 3 years, you may be a prime candidate to benefit from refinancing.
A new consideration in the refinancing decision that many aren’t aware of – are you still able to benefit by getting a tax deduction for mortgage interest? I’d encourage you to pull out your 2018 tax return. If you paid someone to prepare it for you, you should have a 2017 vs. 2018 summary comparison that illustrates the impact of the tax reform act. Are you now taking only the ‘standard deduction’ of $24,000 for a married couple filing jointly? Is so the result is, net of income taxes, your mortgage interest now costs you more. For example, if you previously paid and deducted $10,000 in interest and are in a 25% marginal tax bracket, you saved $2,500 in income tax ($10,000 x 25%) for a net of tax cost of only $7,500 ($10,000 - $2,500). Without a tax deduction, your cost is the full amount, $10,000.
In addition to understanding the new tax rules, there are several decisions in deciding to refinance your home including: the length of time you plan to live there, the total closing costs and the resulting cost savings. The ability to eliminate private mortgage insurance (PMI) is another important consideration.
Take a scenario where the homeowner saves $100 on the monthly mortgage payment but incurs a cost of $2,400 in loan closing costs. It takes 2 years to recover your costs ($2,400 / $100 = 24 months or 2 years). If you plan to stay in the home for more than 2 years, refinancing would make sense.
A refinance that will remove your private mortgage insurance, or PMI, may be worth doing for that reason alone. If you currently pay PMI, have at least 20% equity based on current market value, and your current lender will not remove it, you should consider refinancing.
- Do you still get a tax deduction for your mortgage interest? With the new tax laws in 2018, most people no longer get the deduction.
- Make sure you plan to stay in the home long enough to recoup the costs of refinancing.
- Rule of Thumb – refinancing makes sense if you can lower your mortgage interest rate by ½% to 1%.
- Getting rid of private mortgage insurance, or PMI, is a good reason to get a new mortgage.
Give us a call to discuss how the considerations above apply to your specific situation. Saving, planning and investing do not have to be intimidating. Let us help.