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Perhaps a Silver Lining- Time to Refinance?

Written by Les Detterbeck.

silver lining cloud

The coronavirus has been brutal. There are now over 1 million cases and 54,000 deaths worldwide. Left to itself, the covid-19 pandemic doubles every few days. Millions have lost their jobs. Most of America is on lockdown. We’re certainly in a recession right now. Worse yet- there continues to be a huge uncertainty as to when the coronavirus will stop its path of destruction and when we can all start to return to some form of normalcy.

We sincerely hope you and your family are safe and healthy. And, we hope all the other Americans and fellow citizens of Planet Earth that have been impacted will get through this crisis quickly and successfully.

At the same time, the equity markets have crashed since February 19th, ending an 11 year bull run. We were probably due for a pullback or correction after the huge run-up in 2019. The coronavirus seemed to provide the tipping point. Economic growth in 2020 will certainly be less than 2019, though we don’t know how much less.

With all of this gloom, here is one possible “Silver Lining.”

With many investors running for safety into bonds and the Fed dropping rates, the fixed income markets are showing huge drops in interest rates. 10 year treasuries are near .6%. 30 year U.S. treasuries are at 1.25% interest. These rates foretell less economic growth and lower inflation in the future.

The Mortgage Bankers Association is forecasting lots of business this year for new purchases and refinancings. They expect $2.6 trillion in new mortgages this year, a 20% gain over 2019. Refinancings are the key drivers of the change and are expected to be up 37% in 2020. Bloomberg reported yesterday that the average rate for a 30-year mortgage loan was 3.33%, down from 3.5% last week.

Because there are typically costs to refinancing, doing so makes the most sense for people who plan to stay in their house for some time and where the cost to refinance is less than the interest expense that can be saved. In addition, if inflation will be lower in the future, then nominal investment returns should be lower as well. For example, if your nominal investment return is 6% and inflation is 3%, then your “real” return is 3% (the amount above inflation). If inflation is 1.5%, then a 4.5% nominal return produces the same 3% real return.

If you have a mortgage with an interest rate of 4% or more, you likely should be looking at refinancing it or paying it off. Because of the increase in the standard deduction and the limitations on state and local income taxes, 90% of households no longer itemize deductions. If you are in that 90%, you get no tax benefit from your mortgage interest.

So, if it is time to look into refinancing, check around and keep your eyes open for low mortgage rates. At this point, there is no reason to believe that rates will be going up anytime soon. And, if you would like a second set eyes to help you determine if it is time to refinance, give us at DWM a call. We are always happy to talk. Stay well.

Stay safe and stay healthy during this pandemic. And, if appropriate, take advantage of one of the few silver linings of the pandemic by refinancing at a new low rate.

https://dwmgmt.com/

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