Should You Refinance Your Mortgage?
While the recent coronavirus fears are sending shock waves 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 2/24/2020) . 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 adjustable rate mortgage (ARM) or permanent loan and the length of the loan. With an ARM, you have a certain amount of time (often 5, 7, or 10 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 thirty 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 additional 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 , 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.
Contact our office with any questions you might have.
The opinions voiced in this material are for informational purposes only and are not intended to provide specific advice to any individual. Consult your legal, tax, and/or financial advisor to determine what is appropriate for your situation.
Sponsorship and Events
We’re excited to sponsor The Buddy Foundation of Maryland’s newest fundraiser: Squash Dog. Registration includes a t-shirt, match play, food by Blue Pit BBQ, drinks, and childcare offered by NAPP!
Matches take place from 3-6 pm on March 8, round-robin style, and are open to ages 10 and up. Silent auction and raffle also featured. Bring the whole family: tickets are $30 for guests wanting to enjoy food, drink, and some pickle ball fun!
Proceeds go toward the organizations efforts to save canine lives.
Debbie will be at a table during the event. If you’re there, be sure to stop over and say hi!
Sign up here .
Away from the Office
March 11th and 26th
Both Woody and Debbie will be in the DC area for appointments on these days. We will be accessible via phone and email, but no one will be at the Baltimore office.
We are always accepting donations for the local animal shelters – toys, tennis balls, collars, leashes, food, cat litter, cardboard trays, office supplies, cleaning supplies, towels, mats, washcloths, etc. We will accept donations Monday-Friday between 9am & 5pm.
As you likely know, I treat my birthday like a national holiday. Heidi and Elise sang happy birthday and treated me to gifts and cake after breakfast. Having the day off, afforded me the time to take Elise to school in the morning-which is always special. In the afternoon, Heidi surprised me with my gift: a few simulated skydives at iFly. It was an experience I’ve been wanting to try for a while and we had a great time.
I hope you enjoyed this month’s newsletter!
Woody Derricks, CFP®, ADPA®
CA Insurance License #0C40217
As a Registered Investment Advisor (RIA), Partnership Wealth Management is committed to providing our clients with financial planning and wealth management services to help them work towards their financial goals. At Partnership Wealth Management, we have a long history of working with the LGBT community. Among the many services we offer are financial planning and estate planning strategies for gay and lesbian couples. Financial planning is an important part of preparing for the future; contact us today to get started.
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