Manage your debt by refinancing your home, credit cards, car loans, personal loans, etc.
If you plan to stay in your home long enough to make the closing costs worthwhile, see if refinancing your mortgage makes sense. Most people don’t realize that not only can you refinance a mortgage, you can refinance your car loan and personal loans and at very little cost. Another way to refinance other debt is by doing a cash-out refinance of your principal mortgage. However, a cash-out refinancing is usually at a bit higher a rate than for a conventional mortgage. You would need to consider if it’s worth it to have the current mortgage balance carried at a slightly higher rate in order to wrap in other debt balances. If you do wrap other debt into your mortgage balance, you would also need the discipline to continue paying higher mortgage payments to pay off the debt you wrapped in under the same timing it would have been paid off (or sooner). Otherwise, you’ll pay much more in interest even with a lower rate if you stretch the term out. If you wrap credit card debt in, you’ll also need the discipline not to rack up more credit card debt. You certainly wouldn’t want to have your home at risk with a bigger mortgage that you possibly wouldn’t be able to afford if you get yourself in a bind.
Should you choose an Adjustable Rate Mortgage (ARM) or a fixed-rate mortgage? Unless you only plan to remain in your home for a limited number of years, generally it would be more beneficial to lock into a low interest rate with a fixed-rate mortgage.
Improve your home
If you have home improvement projects that make sense to do in your situation, now may be a good time to do them. If you have excess cash earning very little for the time being, perhaps you use cash to pay for the improvements. If you need to finance it, consider whether you should do a cash-out refinance or use a home equity loan or a home equity line of credit. That depends on the amount you would need to finance and how long it would take to pay it off. If it would only take a couple/few years to pay off the balance, then a home equity line of credit could be the best option. It has lower initial rates, lower closing costs, and the likelihood that you pay if off before its rate floats up much. If it could take longer to pay off, the cash-out refinance or a home equity loan could make better sense to lock in the lower rate and minimize the interest cost over the life of the loan.
Certain strategies work best in a low interest rate environment.
- Intra-family loans– You can help family members by giving them a low-interest rate loan or hold a seller-financed mortgage for them. The loan has to be a bonafide loan with a rate of at least the IRS’s applicable minimum interest rate based on the term of the loan. That rate is usually less than the rate they can get at a commercial bank and they’ll benefit by locking that in for the term. This works well when you can’t afford to fully gift them the money or simply don’t want to for various reasons. You’ll earn something on your money, but won’t be able to take advantage of higher interest rates later. Therefore, this has to make sense for your financial situation. You’ll also have the flexibility to periodically forgive principal if you so choose as a way to make occasional gifts. If you have a taxable estate, this will cap further growth on that principal in your estate to the low rate you earn on the loan.
- Transfer wealth to heirs on a deeply gift tax-discounted basis using Grantor Retained Trusts or Charitable Lead Trusts- These trusts allow you to transfer wealth to heirs at the end of a chosen time period, while providing you or a charity use of the money in the meantime. Since your heirs won’t receive the money for some time, the gift is discounted for gift-tax purposes. That discount deepens with the lower interest rates. Any growth of trust assets above the initial interest rate escapes transfer tax completely.
The low interest rates likely won’t stick around much longer as the Fed has already started rate increases and is planning further increases ahead. Though we haven’t liked these low interest rates when we think about our savings accounts or bonds, they do pose great planning opportunities to get your financial house in better order or to transfer wealth.
Cindi Turoski is a managing member of Bonadio Wealth Advisors based out of our Albany, NY office.
This material has been prepared for general, informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. Should you require any such advice, please contact us directly. The information contained herein does not create, and your review or use of the information does not constitute, an accountant-client relationship.