Should Home-Owning Clients Refinance Their Mortgages Now?by
Interest rates are currently at all-time lows, and many clients are wondering if this presents an opportunity to refinance their mortgage. Is now the right time to take this step?
Interest rates are currently at all-time lows, and many clients are wondering if this presents an opportunity to refinance their mortgage. This could offer clients a great opportunity to lock in low rates and reduce their monthly payments. It could also put them on a path to paying down their mortgage debt more quickly.
As I write this, the average rate on a 30-year fixed mortgage is 3.375 percent, while rates on 20- and 15-year ones are even lower, according to NerdWallet. Tax professionals can use this opportunity to reach out to clients who have significant mortgages at rates higher than these. In many cases, you want to be able to reduce your interest rate by at least one percent to make a refinance worthwhile, but you should evaluate each situation on its own merits as well as consider the client’s goals and objectives.
Here’s how accounting professionals can help home-owning clients decide if they should refinance their mortgage now:
1. Align yourself with a true mortgage professional. This should be someone who is not a salesperson, but more of a consultant. Their goal should be to guide you and your client through the refinance process. Having the right person on your team will add tremendous values, as they can run most of the numbers for you and ultimately tell you if refinancing is a good idea. Even more importantly, they should be able to let you know when it’s not the right move.
So, how can you find this individual? My recommendation: Look for a mortgage professional who’s also a broker (i.e. someone who isn’t tied to just one financial institution. Every lender has its own set of criteria for a loan, and the last thing you want to start refinancing only to find out the bank is not interested in your loan or does not provide a competitive rate.
Having a broker who can use several institutions is the best way to avoid these scenarios. It allows them to gather your information on behalf of many lenders and then shop the available options to see who will be most interested in a loan while providing an ideal rate and term. As a result, your client will have more options.
2. Given the current economic environment and the coronavirus outbreak, it will be key that your client remains current on all of their outstanding debt obligations. They will need to maintain their credit to have a smoother time refinancing. Lenders will be tightening their guidelines to make sure they are lending to those who are qualified to repay and have excellent credit scores and a credit history with limited or no blemishes. Those with the lowest risk profile will typically obtain better rates and terms for their loans.
3. Once you have the right people in place, it’s time to focus on what your client is trying to accomplish. Are they looking to free up cash flow, pay their loan off sooner, lower their overall cost of borrowing, or take cash out of the property? These are all possible goals one might try to achieve by refinancing.
Running the numbers to see what would be accomplished financially by taking this step is something that should be reviewed by the borrower, their tax advisor and the mortgage professional. Assuming the projections presented, based upon the refinancing, allow your client to reach their goal(s), then it is a great time to refinance. There may never be another opportunity to borrow money at such low rates again. (Keep in mind, we have heard this for the last 10-plus years, and although rates have increased along the way, we have been in a long-term downward trend.)
Rates being at all-time lows is not reason enough to finance on its own. You need to make sure the decision makes sense from a monetary standpoint and helps you reach your non-monetary goals and objectives.
As an example, your client may have 25 years left on their loan that they want to be paid up in 15 years, when their children will begin college. You may need to analyze what the benefit would be to refinance into a 15-year loan versus simply paying the current mortgage down more quickly so it is zero in 15 years. All else being equal, should a financial benefit exist from refinancing, this presents a great opportunity for your client to lower their borrowing costs and reach their goals.
Debt, like any other financial instrument, is a tool. Use it properly, and it could enhance your financial situation; use it frivolously, and it could be a tremendous detriment. Refinancing is not a decision that should be made lightly and without all the facts.
Working with your clients and their mortgage professional will ensure that they are refinancing for the right reasons and receiving a benefit by doing it. The last thing you want your client to do is refinance simply because rates are so low. Refinancing simply for the sake of it can put your client in a worse position.
As their tax advisor, this is a great way to enhance your relationship with your client. Helping them save money, manage their debt wisely, and reach their goals will make them a client for life.
This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.
Lawrence Sprung CFP® is the President and Founder of Mitlin Financial, Inc. He entered the financial industry in 1996 and continues to be inspired and energized by the challenge of helping his clients achieve and even surpass their financial goals.
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