by Mary Lago, CFP®, CTFA
Executive Vice President, Portfolio and Wealth Management
With interest rates dropping, you may be considering refinancing a mortgage. There are a number of factors to consider and below are some questions we pose to clients to help with the process.
Can you improve your interest rate? Many of us are curious about refinancing upon hearing about a lower rate. Certainly, interest rates are an important consideration, but they should be evaluated along with the costs associated with refinancing and length of time you plan to live in the home. Ask your banker or broker to provide you with an analysis of how long it will take you to recoup your upfront refinancing costs before committing to a new mortgage. This analysis should include the costs of refinancing regardless of whether you pay them upfront or include them in your new mortgage. If your interest savings in the first 24-to-36 months will more than cover the appraisal, bank financing, any pre-payment penalties and title and escrow fees, it might be an easier decision. But keep reading …
Do you want to reduce your monthly payments? If you want to improve your cash flow and you expect a future liquidity event, such as the sale of a business or a family gift, a refinance might be an attractive option. For example, a new 30-year mortgage would have a lower payment than your existing mortgage with 20 years left … even at the same interest rate. Extending your mortgage will generally result in paying the bank more interest and could include paying a mortgage into retirement. Carefully consider the long-term impact along with the short-term benefits.
Photo Credit: Amy Covington
Did your original mortgage have a guaranteed lower rate, but only for a limited time? An example of this is a 5- or 7-year adjustable-rate mortgage (ARM). If yes, and you plan to stay in your home, it might be worth locking in a fixed rate for a longer timeframe.
Are you looking for a source of cash to make another investment or home improvement? If you have been considering sources of cash, it might be a good time to take a closer look at all of your options, including refinancing. Of course, a careful cost-benefit analysis should be completed to evaluate if the purpose is worthy of increasing your debt.
Do you rely on mortgage interest deduction in your tax strategy? The Tax Cuts and Jobs Act of 2017 limits the deduction of mortgage interest to the initial $750,000 in mortgage debt, including home equity line of credit (HELOC) if used for home improvement. Debt in place prior to January of 2018 is grandfathered and may be eligible for mortgage interest deduction on debt up to $1 million. In some instances, a refinance could jeopardize this grandfathering so be sure to review your specific circumstances with your tax advisor.
As with any decision involving your financial matters, it is extremely helpful to take a step back and reflect on what has changed since the last time you focused on the topic. For example, has your marital status changed since the last time you purchased a home or refinanced? Do you need to update the title on your property or mortgage? This might be a good time to review what life changes have unknowingly impacted your assets and overall balance sheet.
If you would like assistance in taking a broader look at your financial picture and options for debt, reaching out to your portfolio manager can be a good first step.