Is this the Time to Refinance?
Although mortgage rates climbed steadily in 2018, they have come down since the beginning of the year. According to BankRate.com , current rates for 30-year mortgages are 3.98% nationally (rates posted online as of 5/17/2019). 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 I know if a refinance makes sense for me? The most common reason to refinance is to reduce your monthly payment. Even with the fees paid to your lender, a large enough decrease in your interest rate could reduce your monthly mortgage payment. That reduction could be used to pay off other debt or to save for the future.
Another popular reason for refinancing is to shorten the term of your loan. Because rates on 15-year mortgages are often lower than those on 30-year mortgages, you might find that a refinance could lower your interest rate enough that you can keep your payment the same while allowing you to pay off your mortgage sooner.
If you took out an adjustable rate mortgage (ARM), you might be able to lock in lower interest rates rather than risking an increase when your ARM ends.
What type and term of loan should I choose? If you decide to refinance, you’ll have the option of selecting an 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.
When selecting a permanent loan, you can typically choose from a 15 or 30-year period to pay off your mortgage. The 15-year loan often has a lower interest rate than the 30-year loan and allows you to pay off the mortgage in half the time. The drawback to this term is that your monthly payment will be higher than it would be for a 30-year.
I often recommend that my 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).
Because homeowners are estimated to live in their homes for about 13 years 1 , you could find that 30-year mortgage with a 10 or 15-year ARM might work best for you. That’s because the combination of the length of the loan with potentially lower interest rates could help lower your payments and lower the total interest you pay for the time that you live in your home. Keep in mind that if you live in your home after the fixed-rate period ends on your ARM, your interest rate could increase significantly.
What should I watch out for? 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.
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.
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.
Away from the Office
June 12th & 14th
Woody will be out of the office on these days.
Debbie will be out of the 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.
Heidi and I had a chance this month for some adult time. We spent our free day getting dressed up and attending charity events. The first was FreeState Justice’s annual Jazz Brunch (for which PWM was a sponsor). It was a fun and successful event. Heidi and I spent much of our time there with a client and friend, listening to Jazz music, and taking in some of the local art that was on display.
Later that day, we attended the Gay Men’s Chorus’ annual Spring Affair. The emcee, Jackie Hoffman, was the highlight of what is always a very entertaining evening.
After our overnight in DC, Elise got to spend Mother’s Day with three generations of mothers: Heidi, my mom, and my grandmother.
I hope you enjoyed this month’s newsletter.
Woody Derricks, CFP®, ADPA®