Submitted by Susan Powers on August 21, 2019
Mortgage rates are the lowest they have been since 2016 and applications to refinance are up. The national average for a 30 year fixed mortgage has fallen to 3.6% as of August 14, 2019, down almost 1% from the average rate of 4.54% in 2018. A good rule of thumb – refinancing makes sense if rates are at least ½% to 1% lower than your current rate. If your current rate is more than 4.375%, and it likely is if you purchased your house in the last 3 years, you may be a prime candidate to benefit from refinancing.
A new consideration in the refinancing decision that many aren’t aware of – are you still able to benefit by getting a tax deduction for mortgage interest? I’d encourage you to pull out your 2018 tax return. If you paid someone to prepare it for you, you should have a 2017 vs. 2018 summary comparison that illustrates the impact of the tax reform act. Are you now taking only the ‘standard deduction’ of $24,000 for a married couple filing jointly? Is so the result is, net of income taxes, your mortgage interest now costs you more. For example, if you previously paid and deducted $10,000 in interest and are in a 25% marginal tax bracket, you saved $2,500 in income tax ($10,000 x 25%) for a net of tax cost of only $7,500 ($10,000 - $2,500). Without a tax deduction, your cost is the full amount, $10,000.
In addition to understanding the new tax rules, there are several decisions in deciding to refinance your home including: the length of time you plan to live there, the total closing costs and the resulting cost savings. The ability to eliminate private mortgage insurance (PMI) is another important consideration.