There is more math in the mortgage process than meets the eye and most borrowers, and even many loan officers, don’t understand all potential ramifications. It’s important to work with someone who does in order for them to present the best, most appropriate information and options to mortgage clients.
Interest rate and monthly payments are important, but seldom should those numbers be the only ones considered. For example; if someone had a mortgage with an initial loan amount of $400,000 at 3.875% that’s now five years old, a refinance at a rate in the 4.25% range wouldn’t appear to make sense. However, it might make perfect sense, but understanding relevant numbers is needed to determine as such.
Factors including federal and state tax brackets, debt-to-income levels, savings/investment levels, debt-to-asset (net worth) ratios, etc., should be considered. In this example, even at 4.375%, the payment would be lower and the tax deduction higher and that might tip the scales to the “makes sense” side.
I arranged a refinance (no cash out) for a high-tech engineer once and the new rate was .25% higher than the old. Annual interest cost increased by over $1100 per year but net annual savings was more than double that amount!
How? Because with his high income and marginal tax bracket, the additional $1100 interest deduction dropped taxable income a full tax bracket reducing his tax liability by over $2350 the first year! He joked that if his income rose enough to bump him another bracket or two, he’d want me to raise his rate again!!
Mortgage loan originators have a legal responsibility to act in a client’s best interest and I believe that includes educating themselves sufficiently to be able to present all appropriate factors to a client so they can make the best, most informed decision.
Joe Adamson
NMLS #234559
Ca. BRE #01090504
