Be Careful When Refinancing

Several of our clients have found opportunities in refinancing over the last several months.  Even with already low interest rates they are finding financial benefit in reducing the rates even more and extending their amortization back out to get what seems like unbelievably low monthly payments. In reviewing refinances, I have come across two mistakes that are worth knowing if you are in the process or considering a refinance. Both are easy to handle and likely do not affect the decision to move forward.

1. We have seen clients receive offers to cash-out refinance below 3%.  This can be exciting particularly when we are talking the opportunity to invest that money and have 30 years of arbitrage. Your house will appreciate at the same rate either way, and you can use some of the equity to grow in your portfolio.

The Tax Cuts and Jobs Act of 2017 considers a cash-out refinance to be debt restructuring and eliminates the deduction of your interest payments unless you spend the cash out to improve the home.   If you use the standard deduction anyway this may not be an issue.  If you itemize, this can cause an annual tax increase that most people will not see coming. If you put the funds into your portfolio you could use interest tracing rules to allocate a portion to your original home interest deduction and use the new portion against your investment activity but understand that is going to complicate your tax filing (and cost from your tax provider).

2. Having only one spouse on the loan. At face it sounds cool. The lender says, “let’s see if we can qualify with just the larger income earner on the loan so that we don’t have to hassle the other spouse while underwriting.” The clients discuss it and think it does not harm the spouse because they are still on the title of the mortgage and have not lost any rights to the property. 

The clients do not think about what happens if the higher earner dies. It may be unlikely but in financial planning we look not only to chart a successful path but also negate potential threats. If one person is on the mortgage and two people own the property, the loan is considered in default if the person on the loan dies.Yes, the surviving spouse still owns the property but that amazing rate you got is forced to rates at that time. Worse yet, what if the surviving spouse does not qualify for a new mortgage on their own.Even if it works out mathematically the last thing the survivor needs is to go through underwriting on top of everything else, they are dealing with at the time.