One of the silver linings of a worldwide pandemic is extremely low mortgage interest rates. The Federal Reserve just announced that interest rates would remain low through 2022: https://www.cnbc.com/2020/06/10/fed-meeting-decision-interest-rates.html
In fact, current interest rates rival the historic low interest rates of the Great Recession about a decade ago. As such, this is a great time to refinance any mortgage loans that you have to take advantage of the low rates. However, there is even more than you can do to fully leverage this low rate opportunity. Here are some ideas:
Idea #1: Refinance your primary home mortgage and pull cash out to buy an investment property (or possibly a 2nd home). This makes your money really work for you – increasing the velocity of your money and using the increase demand for rental properties to pay down an appreciating asset. Rates on primary home mortgages are lower than investment property mortgages so a great strategy for purchasing a rental property is to possibly purchase the whole property with equity from your principal residence or use it simply for the down payment. This will create possible tax savings for you and, as mentioned, there is a increasing demand for long-term rentals as evictions and foreclosures will rise during this recessionary period.
Idea #2: Convert your primary home into a rental and buy a new primary home. This allows you to keep your low rate on your rental and get a new low rate on your new primary home. Additionally, we can recognize the future rental income on the home converting into the rental which can make it easier to qualify for that home of your dreams!
Idea #3: If you are in your ‘forever home’ and want to simply pay off the home faster, refinance your 30-year loan into a 15-year loan to save both interest and time. Rates on a 15-year fixed rate mortgage are always lower than the 30-year mortgages and, in our current environment, rates can be under 3%. With rates as low as they are, your monthly payment on a 15-year loan may be better than you think.
Loan term 30 years 15 years
Interest rate 4.25% 2.75%
Monthly payment $1229 $1696
Total interest over term of loan $192,000 $55,000
*rate on 30 year was assuming you had not refinanced it into current rates – rates on a 30-year loan are in the low to mid-3’s in most cases right now but it varies depending on the qualifications.
There are a lot of things to consider on if a refinance makes sense for you:
- Does it help to achieve my financial goal? Am I improving my financial position?
- What are the fees associated with the refinance and how long will it take me to recoup my costs with interest savings? (my rule of thumb is a 2 year or less break-even on a straight refinance with no cash out)
- How long do I plan to own this property?
If ever there were a time to consider a refinance, historically speaking, now is the time.
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