A year ago, the Federal Reserve, economists and realtors were bracing for higher mortgage interest rates for 2019. The rationale was simple: The economy was growing and, as a result, the 10-year Treasury bond, the benchmark for most mortgages, was likely to remain elevated.
The economy is still growing, but the pace has slowed, which means that home loan rates have dropped by almost a full percentage point — 30-year mortgages have fallen from nearly 4.5% to 3.6% today, according to Freddie Mac.
The slide has prompted another round of the perennial question: Is it time to refinance? According to mortgage analytics firm Black Knight, more than 8 million homeowners could refinance for an average savings of $270 per month.
Here are some of the reasons homeowners should consider a refinance right now.
Lower monthly payments: Maybe your current loan has a high interest rate or perhaps you originally had a 15-year loan and realize that you need more cash flow flexibility and want to move to a 30-year to improve your ability to fund other goals, like retirement or college. One big caveat: The costs of the refinancing (usually 2% to 5% of the loan amount) must be incorporated into your analysis. If closing costs are $5,000 and you will save $270 per month, it will take you 18.5 months to break even. If the monthly savings are lower, it will take longer to break even, which may or may not make sense depending on how long you think you will be in the house.
Free up equity: If the equity in your home is tempting you to renovate a kitchen, pay an upcoming big bill or pay off another outstanding debt, be very careful. The Tax Cuts and Jobs Act that went into effect in 2018 changed the tax deductibility rules, limiting interest you pay on a loan secured by your main home or second home to buy, build or substantially improve your main or second home. So if your refi is used to pay off another debt, that amount would not be deductible. Additionally, the tax cut act placed a new dollar limit on total qualified residence loan balances. If you refinance, you can only deduct interest on up to $750,000 in qualifying debt.
Convert to fixed rate from an adjustable or balloon loan: If you purchased a home with an adjustable rate mortgage, last year’s increase in rates may have spooked you. With rates lower, now might be a good time to lock in a loan that will never cause palpitations when rates rise in the future. For those who have balloon loans, (a loan with a fixed rate for a specific period of time, which “balloons” at the end of the term, when a lump-sum payment, equal to the remaining balance of what you owe, is due), perhaps circumstances have changed and you plan to be in the house longer than you expected or you do not want to use your cash to pay off the loan at the end of the term. If that’s the case, a re-fi could be the answer.
Get out from private mortgage insurance: If you purchased your home with less than the “standard” 20% down payment, you are paying for PMI, which can tack on 0.3% to 1.5% of the original loan amount every year, depending on your credit score and the size of your down payment. If the value of your home has increased since the original purchase and you now have 20% equity, a refi may reduce your interest rate and release you from that PMI payment.
Jill Schlesinger, CFP, is a CBS News business analyst. Email: firstname.lastname@example.org
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