Instead of looking at the negative side of tax reform, savvy homeowners and investors are figuring out how to use the new tax rules to their advantage. Some wonder why refinancing now can be a good investment. According to a recent piece by cnnmoney.com, the new rules lower the amount of mortgage interest that taxpayers may deduct to $750,000 instead of up to $1 million. But interest deduction is only one factor to consider.
Staying put and maxing out property tax deduction
The new tax law puts a $10,000 cap on local and state property tax deductions. Because of the cap, it may not make sense for some homeowners to sell their homes and buy a more expensive house. If you owe $10,000 or less a year on property taxes, you can enjoy the maximum property tax deduction when itemizing. If you move to a home with higher property taxes, it may not the best use of your money since you wouldn't be able to write anything above $10,000 off. Additionally, some housing experts theorize home values may start to go down as people feel less of a financial incentive to own.
Locking in on low-interest rates
Interest rates still sit below 4 percent, according to CNN Money. If you have at least 20 percent equity in your current home, your lender will not require you to pay PMI (private mortgage insurance) when refinancing. Although mortgage rates are low now, they will likely rise. In fact, some experts point to tax cuts as a reason for increased inflation pressure. The Federal Reserve often increases interest rates in response to inflation.
Considering a cash-out refinance
According to a recent Ellie Mae origination insight report, more homeowners are refinancing in light of tax reform. The mortgage interest deduction limit is the main reason for the jump in refinances. But homeowners also realize they can tap the equity in their homes with a cash-out refinance. People who were previously underwater on their mortgages had fewer options. Now that home values are up across the country, homeowners have greater equity. For some, it may be a good time to update a kitchen or bathroom, add an addition or renovate for an Airbnb business.
In the long-term, refinancing helps with tax benefits. While some people will take the standard deduction starting in 2019, luxury homeowners may receive a greater financial benefit by itemizing. For people who pay PMI, refinancing often cuts out that unnecessary expense every month. Most appraisers today find even homes bought a few years ago now have 20 percent equity because of the rapid home appreciation situation. In the short-term, a cash-out refinance provides needed money for home improvements or other financial needs. People who wait years to refinance will likely miss out on the current low-interest rate environment. If you want to pay off your mortgage in less time and reduce how much you pay, consider shortening the loan term from 30 to 15 years when you refinance. Every family has a different financial goal in mind. Consider whether you need to free up cash, whether you want a lower monthly payment or to own your home outright in half the time.
At First Savings Mortgage, we help homeowners interested in getting the most out of their mortgages with a smart refinance. Talk to us about how refinancing can help in the short and long run. Ask us about the latest interest rates and terms. For more tips on refinancing in light of tax reform, please contact us.