With mortgage rates below 4% since May 2019, you would think that most people would have already refinanced but according to a recent Lending Tree survey, 49% of homeowners say they are considering a mortgage refinance in the next year. The report estimated that over a third of homeowners have mortgages above 4% and 11% didn’t know what their rate was.
Slightly more than a third of the people surveyed regretted missing the opportunity to refinance in 2020 when rates did hit their historical low. Homeowners should not beat themselves up on this issue because the only way to tell that it hit bottom is after it has started going up again.
The current rates are very favorable to borrowers and some economists believe that when inflation is factored in, the rates are close to zero effectively.
While there are nine specific reasons people choose to refinance their homes, two are among the most prevalent: to lower the payment or take cash out of the equity. Most reasons include:
There are some commonly held myths about refinancing among homeowners such as:
If your current mortgage is a FHA, there is limited borrower credit documentation and underwriting program. The mortgage must be current and not delinquent, and the refinance must result in a net tangible benefit to the borrower such as a lower rate, lower payment or better terms. For more information, see Streamline or contact an FHA approved lender.
VA has a similar program if your existing mortgage is a VA-backed home loan. The purpose is for a borrower to reduce their payments or make their payment more stable. They must certify they are currently living in or did live in the home covered by the loan. The Interest Rate Reduction Refinance Loan, IRRRL, may be available.
USDA also has a program for current USDA direct and guaranteed rural homebuyers who have been current on their payments for 12 months prior to requesting the loan refinance. No appraisal or credit review is required. There must be a minimum of 40% net reduction to the PITI payment. More information is available.
Before refinancing your home, determine how long you plan to keep the home. If the reason for refinancing is to save interest by getting a lower rate, you may accomplish that immediately. However, if you plan on selling soon, you may not be able to recapture the cost of refinancing.
There are costs associated with refinancing regardless of whether you pay for them in cash, or they are rolled into the cost of the mortgage. These costs can range from two to five percent of the mortgage.
There is a little-known provision in the tax code that allows homeowners to rent their principal residence or second home for up to 14 days a year without having to recognize the income. In this situation, the taxpayer does not deduct the rental expenses associated with the income.
There is no restriction on how much you earn. If your first or second home is in a desirable area where people are looking for short-term rentals, it could provide a windfall to the homeowner.
In cities where any big sports championships are played, there could be a market for a temporary rental of a home. Events like PGA tournaments, college basketball tournaments, Bowl games, NFL playoffs and others can create a demand for this type of rental.
For instance, there are people in Augusta, Georgia who rent their homes during the Master’s Golf Tournament each year. There are not a lot of hotel rooms in the area relative to the number of people who usually attend in non-pandemic years and the homes can fetch a nice daily rate.
There can be confusion about the different types of properties and what constitutes a home. The intended use coupled with actual experience will usually determine the type of property.
There are four types of property. A principal residence is the home you live in. There is income property that you rent and do not live in. There is investment property that is primarily held for an increase in value. And, there is inventory, which is related to your business like homes that are built or purchased to be flipped.
A second home is one that is used for the primary enjoyment of the owner in addition to their principal residence. Taxpayers are allowed to deduct the mortgage interest and property taxes on a first and second home up to specific limits. A vacation home could be another name for a second home but more accurately, it is a rental property that has more than 14 days of personal use during the year. It becomes a hybrid.
You might want to check with your insurance agent to see if your current policy covers temporary rentals, including liability in case of an accident involving personal injury. This could affect your decision as to whether you want to consider the rental.
For more information, see IRS facts about renting out a residential property or consult your tax professional.