Home is where the heart is, but it often involves one of the more important financial decisions many people will make in their lifetime; deciding to refinance your home’s mortgage. It is quite common for people to refinance their 30- and 15-year loans. Just because you had a certain interest rate at the time of taking out your initial loan does not mean you are stuck at that rate forever. According to the Mortgage Bankers Association, the typical American homeowner will refinance their mortgage every 4 years. They also found that refinancing activity is about 50% higher than it was a year ago.
Refinancing a mortgage means paying off an existing loan and replacing it with a new one. There are many reasons why homeowners refinance:
- obtain a lower interest rate
- shorten the term of their mortgage
- convert from an adjustable-rate mortgage (ARM) to a fixed-rate mortgage, or vice versa
- To tap into home equity to raise funds to deal with a financial emergency, finance a large purchase, or consolidate debt
Currently, mortgage interest rates for 30- and 15-year fixed-rate mortgages (FRMs) are at all-time lows. On Friday, November 06, 2020, according to Bankrate’s latest survey of the nation’s largest mortgage lenders, the benchmark 30-year fixed mortgage rate is 3.060% with an APR of 3.790%. The average 15-year fixed mortgage rate is 2.620% with an APR of 3.310%. Many consumers are taking advantage of the lower rates to lower their monthly payments, which means they can spend, save, or pay down debt.
When the mortgage and real-estate conditions change, it can be beneficial for borrowers to have a loan that meets their financial needs and goals. If your financial situation has changed since you took out the initial loan, and you plan on remaining in the home for several years, it may help to look at refinancing. When you have a longer loan term, such as a 30-year FRM, you often end up paying more in just the interest of the loan. When you refinance at a time when rates are low, you may be able to shorten the length of the loan and also save some money on interest. A lower interest rate on your mortgage means smaller monthly payments, and more of your payments going toward paying off the principal of your loan.
Also, with the consideration of taxes, starting in the tax year of 2018, couples filing jointly can deduct the interest on up to $750,000 of qualified home residence loans; couples filing separately can deduct interest on up to $375,000 of qualified debt. The amount decreased from $1M ($500,000 for couples filing separately) under the Tax Cuts and Jobs Act. If you secured your loan before Dec. 16, 2017, the previous limits apply to your deduction. For taxpayers who are able to itemize their deductions, their after-tax cost of the mortgage may be even less.
However, there are also some potential obstacles to consider before refinancing. Refinancing loans have closing costs just like a regular mortgage and they can take quite a bit of time and paperwork to get approved. There is generally no guarantee on how much you will save, and sometimes the savings may be minimal, depending on your financial situation. If mortgage rates are 1% less than your current rate, it may make sense to consider your refinance options.
If you are considering refinancing a mortgage, or are wondering if it may align with your future financial goals, it may be a good idea to discuss with your Ciccarelli Advisory Services financial advisor first.
Investment advisory services offered through Ciccarelli Advisory Services, Inc., a registered investment adviser independent of FSC Securities Corporation. Securities and additional investment advisory services offered through FSC Securities Corporation, member FINRA/SIPC and a registered investment adviser. 9601 Tamiami Trail North, Naples, FL. 239-262-6577.