When mortgage rates are low, should you refinance? Part 3: A Few Final Considerations
Creating cash: If you have enough equity in your home, you can “cash out” some of it. This simply means you borrow more on your new loan than you owed on your old one, and pocket the difference. This may make sense if you are planning for home improvements, or you can invest the cash at a higher rate than the loan’s interest rate will cost you. But this is a loan, not free money. I don’t advise adding to your 30-year mortgage to spend on something with a shorter life, like a car or a fun vacation.
Fixed vs. adjustable rates: Fixed-rate mortgages have the same interest rate the entire term. Adjustable-rate mortgages (ARMs) have rates that “float,” or adjust up or down over the loan term, based on then-current rates. If you plan to be in your home for a while, it’s usually better to lock into a low-rate, fixed rate … even if ARM rates are even lower. But say you plan to move in 5 years. A smart choice might be an ARM with a 30-year term, set to adjust after 5 years. You’ll get a slightly lower rate upfront. And, if you’ll be selling the house and paying off the mortgage in 5 years anyway, you won’t care if it adjusts upward then.
Tax ramifications: If you’ve been deducting your mortgage interest on Form 1040 Schedule A, a lower mortgage rate might lower your tax write-off. For example, if your mortgage interest drops by $100/month, you are really only saving $70/month if you were writing off the interest at a 30% tax rate. I suppose the “good” news is, far fewer taxpayers are itemizing deductions anymore, opting for the typically more favorable standard deduction instead. As such, tax ramifications may not be as important as they used to be.
With that, we’ll call this series a wrap. If you’d like to reference it again, you can download the full report by visiting alliantwealth.com/resources/whitepapers.html.
John A. Frisch, CPA/PFS, CFP®, AIF®, PPC™ founded Alliant Wealth Advisors in 1995 and has over 30 years of experience as a financial professional. In his free time, he’s an avid long-distance runner, a sport that requires discipline, patience and vision. John applies these same skills to his professional pursuits: He helps families and retirement plan sponsors adopt a patient, disciplined approach to overcoming financial challenges and reaching their distant goals along a clear path. Learn more at www.alliantwealth.com.