Checklists are marvelous tools for getting things done. They are also my favorite mechanism for making decisions. Facing a project that requires a commitment to time and usually money are things most of us would rather ignore especially if not on a deadline. Once the item is complete and marked off our list, we are less than likely to reassess the situation. Refinancing a house is one of those issues.
We are at historically low-interest rates and that includes mortgages. A 15 year fixed rate mortgage is priced at 2.65%. That is unfathomable for those of us that worked in the 1980s with rates above 10%.
Get your checklist out and determine what you should do about this opportunity to readdress your mortgage. There are things to consider.
You can refinance your existing mortgage with your current lender easier than you might think. In many instances, you don’t need a new appraisal and all the accompanying documents normally required. You will pay a fee for closing that they will gladly add to the loan. The interest savings in one year may be greater than the cost of the refinance.
If you are in a situation where you desire to withdraw equity out of your home, there are more things to consider and the cost will likely be higher. Naturally, the higher your credit score and the lower your debt to income ratio is, the easier the lending process will be.
What if your mortgage is paid off already? Should you be getting a new loan? That is a tougher question and comes down to how you address risk and opportunity in your checklist. Here’s a formula for you to consider:
What is the rate of the mortgage? What do you think you can earn on the money you borrow? The assumption here is that you are withdrawing equity because you believe you can invest the money and earn more than you are paying the lender. There are things you know and things you don’t in this formula. You are certain about the payment and the interest rate to the bank. You are certain over the tax consequences (at least for the short term) regarding deducting the interest, the taxes you will pay on the investment results you obtain or recognize. Determining your level of belief in the investment outcome is the unknown. The greater the return, the better the decision.
We have a checklist available at yourlifeafterwork.com to help address this consideration. When asked if this is a good idea – withdrawing equity out of a home to invest – we have responded affirmatively, absolutely, noway, and probably. Your situation is unique to you.
As in most things, we try to leave age out of the equation. The lender cannot address age. We have a family over 80 who just took out a 30-year loan as an example. We are in strange times and that calls for a new review of previous decisions.
Disclaimer: Joseph Clark is a Certified Financial Planner™ and the Managing Partner of Financial Enhancement Group, LLC an SEC Registered Investment Advisor. He is the host of “Consider This Program” found on WIBC Saturday mornings from 6-7a.m. as well as a podcast of the same name. Joe served as an Adjunct Assistant Professor at Purdue University where he taught the capstone course for a degree in Financial Counseling and Planning.
Securities offered through World Equity Group, Inc., Member FINRA/SIPC, and a Registered Investment Advisor. Investment Advisory services offered through Financial Enhancement Group (FEG) or World Equity Group. FEG is not owned or controlled by World Equity Group.
Joseph Clark and World Equity Group, Inc. do not provide tax or legal advice. For tax advice consult with a qualified tax professional. For legal advice consult with an attorney.