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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. What a difference a year can make! The economy is still growing, but the pace has slowed, which means that home loan rates have dropped by almost a full percentage point, and 30-year mortgages have fallen from nearly 4.5 percent to 3.6 percent 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 2-5 percent 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 that 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 (TCJA) 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 re-fi is used to pay off another debt, that amount would not be deductible. Additionally, the TCJA 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 may 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 anticipated 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 (PMI): If you purchased your home with less than the “standard” 20 percent down payment, you are paying for PMI, which can tack on 0.3 - 1.5 percent 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 percent equity, a refi may reduce your interest rate and release you from that PMI payment.