March 07, 2021
Refinancing – When Should You Refinance?
Refinancing? When should you refinance? Learn about Refinancing on this episode of Daily Wisdom!
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The First Issue is Refinancing
This is kind of interesting because of the lowering of interest rates, so that a lot of the clients attempting to refinance. There’s some issues that go along with refinancing because the interest rates are pretty darn low right now. That’s a good thing and a bad thing. The positive of low interest rates is that you can get a low rate on your mortgage. Right now, I see clients getting less than 3% for a mortgage, which anything below four, I’ve always said is a good idea. Then some people are in the, “Do we pay off the house first or do we have a mortgage at a really, really low interest rate?” There’s pros and cons to both.
The advantage of the carrying a mortgage at a low interest rate is let’s say that your mortgage rate is two and a half percent. If we can earn 4% somewhere else, then you’re just using arbitrage and on top of that, you’re getting what’s called a compounding interest where you’re the one that’s gaining on that interest first, so the bank is gaining interest. So from a numbers perspective, a lot of times, if you can handle that low interest rate mortgage from a financial standpoint, it makes sense to maintain that mortgage.
If on the other hand, we look at it from a psychology standpoint, a lot of times they have this dream of moving into retirement and having their home paid off. That just feels good to be “debt-free.” There’s no right or wrong answer. My background was actually in finance as well as psychology in undergrad, so I understand both and both are valid. But as people are moving towards these refinancing issues, we’re running into questions with regards to how does this affect whether I have a trust or a Lady Bird Deed. How is that real estate owned or how is the real estate titled?
Really, typically what we see is either as what’s called a Lady Bird deed, because we don’t want a home just in your name. If a home is in your name and you pass away, it ends up going into probate, and we know that we want to try to avoid that. So really when we’re planning for the home from a legacy or estate planning perspective, we’re focusing, we’re doing what’s called a Lady Bird Deed where it’s in your name while you’re alive and that upon death, it avoids probate and goes to whoever’s listed on the deed. It’s kind of like a beneficiary designation for your home. Or we might have the trust as the owner of the deed. Typically, this would be if we’re doing like a Castle Trust, like an asset protection trust. Because the advantage of that is you can sell it inside of the trust and the home is protected from Medicaid and that type of thing. That’s why sometimes we have the trust as the owner.
How Mortage Companies Handle Things
When you go about refinancing, it’s really between you and a mortgage company. Each mortgage company can create their own rules in how they want to handle things. We’ve had a lot of different mortgage companies that we’ve been working with with clients. So let me give you the legal answer, and then we’ll talk about kind of the real world answer.
If you are thinking about refinancing and if it’s a Lady Bird Deed, which says it’s in your name while you’re alive, then you can do whatever you want. In fact, the deed will say you can mortgage it, refinance and sell it, et cetera. You have complete control, but some refinance companies have saying, won’t accept a lady bird deed, and we’ve had to go back and forth. From a legal standpoint, the home is in your name, so you can do whatever you want, you can refinance it. So it shouldn’t be a problem. But that said, these mortgage companies are private institutions and they can kind of create their own rules.
If you’re having troubles at one company, you could always look to another company because depending on who you talk to that day at the same company, you might get different answers on some of these things, which can be really frustrating. But from a legal standpoint, if you are doing a Lady Bird Deed, you should have absolutely zero problems with a refinance.
Now, if the trust, if it’s a trust-owned property, so typically we’re doing an asset protection trust at Castle Trust, the way that we draft the trust, legally, you still should have no problem because it’s a grantor trust. There’s this act that I can’t remember, I can’t spell it off the top of my head, but it’s like Gramm-Beech Act of 1993 that says that a mortgage company cannot basically discriminate or trigger a due on sale clause on any type of grant or trust. Meaning if you have a grantor trust, you still should be able to refinance, they can’t trigger any of the mortgage because it’s not technically in your name, even though it’s like in a piggy bank that you’re holding on to. From a legal perspective, they shouldn’t give you any problems on the refinance as well.
But for whatever reason, some refinance companies want you to deed the property out of the trust, do the refinance there, and then deed it back, while there’s other mortgage companies that will do the refinance directly on the trust.
So just understand from a legal perspective, whether you have it as a Lady Bird Deed or the trust owned, you should not have any issues with a refinance, but it might be based on that business, they can have their own rules or procedures. But there are companies that refinance for sure if it’s a Lady Bird Deed without having to do another deed in the meantime, same with the trust owned.
Low-Interest Rates and Refinances
So that’s with the refinancing. Continuing on that thought, with the low interest rates and why everyone’s doing these refinances, that’s good. It keeps the mortgage rates low. But the flip side of the coin and the downside of having this low interest rate is that it’s really affected the bond market. I’ve talked about this before, but there’s this idea that as we move into retirement, maybe we change the amount of equities and bonds and now we go more heavily bond sided. But unfortunately, with interest rates dropping, bonds and CDs are also underperforming. So if you are looking for a safety, you might not want to always just focus on bonds or especially CDs, which aren’t offering a very good rate of return.