With the interest rates plummeting, the banks are bogged down with people rushing to the bank to refinance. Just to make sure everyone knows, if you haven't refinanced in awhile, you cannot write off the interest paid on a home equity line anymore -- that stopped in 2018. And if you do a cash out refinance, the "cash out" portion of the interest paid is also NOT deductible.
However, the rates are crazy good. In mid March I heard people being quoted 1.74% interest rate for taking out a $250,000 or more equity line. Do you want $250,000 when you need much less? Maybe for a rainy day, after all, you only pay interest on what you use, not a bad back up plan for emergencies in these crazy times. And you can refinance your equity line and NOT touch your main house loan. You don't have to do a cash out refi on your main home if you have a great rate on that, and your equity line rate is higher. But just know you won't get the tax deduction on interest.
Some of these super low rates have a three year pre-payment penalty if you try to refinance or want to switch to a loan later, but I have heard from my buddy Rob Gilroy a Bank of America rep (firstname.lastname@example.org), the pre-payment is only $450 and they may waive it if the new loan is with them, but the new loan would be much higher rate. Just know your options and think long term. You can maybe refinance the equity line to a lower interest rate and just use the amount to pay off your existing equity line, and have the rest as back up. Talk to your tax and financial people.
The cash out refi interest rates are also crazy good. I consider my self average and I got quoted 3.375% in mid March. Do you want to start a 30 year loan again... maybe you do, maybe you don't -- who knows. What I do know is you can create a loan amortization schedule in Excel. It is a template already in the Excel program already in your computer.. Check out and see what your costs are over time to maximize your retirement income. The loan amortization rates only show principal and interest payment, you need to add taxes and insurance to that cost. Saving $100 or $200 or $600 a month may look good now, but if you only have five years to pay off your current loan, the amount you pay to go back to a 30 year loan will cost you.
And what about a cash out refi at these low rates to finally build that ADU you have been trying to save for to have income for retirement? After all, most these ADUs cost more or the same as a small investment home out of the area. Do you want an ADU to stay in the area, or do you want an retirement home elsewhere? These are things I think about. If I do an ADU and live in the back, does that change my capital gains tax because my property is partially an investment property? I can't give tax advice, but talk to your tax guy or tax lady. And you will be re-assessed on the ADU in the back. Your taxes will go up based on the cost of the ADU, and you have to pay insurance on that too. Is there any cost savings being in your own yard? or it is worth it because the rents are higher here and the rate of return in better? What is better, higher rate of return or no people in my backyard? Hmmmmmm....
We are all thinking the same things. What will happen to the real estate market? No one knows. My guess though is that with these low rates, and people expecting prices to maybe drop, as soon as the ban is lifted I see a ton of people wanting to sell their homes to get the cash or to buy an investment property with crazy low interest rates. Buyers will want to buy at these rates. I pray the rush in the second half of the year will make up for the first half of the year. All I know is that if I bought stock on the down low a week ago, maybe that would make up from what was lost in our 401Ks. I didn't. Opportunity and fear at the same time. I'm praying for wisdom. No one wants to make a foolish move or panic, but we want to be wise and keep our eyes open. Seek wisdom and be calm and think.
Hang In There People.