By John McGill, CPA, MBA, JD
Coronavirus infections have spiked recently causing economic activity to slow and lowering bond yields and related mortgage interest rates. Rates are at 50-year record lows, with 30-year fixed rates plunging to as low as 2.80%, 20-year fixed rates down to 2.66%, and 15-year fixed rates near 2.37%.
As long as you can reduce your current mortgage rate by at least .75%, have at least 20% equity in your home and a credit score of 700 or higher, you can join the twenty million borrowers who can benefit through refinancing.
Savings on Personal Debt
While most doctors refinance for their current mortgage amount to lower their rates and payments, consider these other options for even greater cash flow savings:
- Consolidate all home mortgages (first and second/home equity line of credit), along with any high-interest rate student loan and credit card debt, in order to lower interest rates and provide a greater reduction in your monthly payments.
- Reduce your mortgage term from 30 years to 15 years to cut interest rates further and get out of debt faster.
- Refinance an existing adjustable-rate mortgage (ARM) into a fixed-rate mortgage to eliminate future interest rate uncertainty and provide greater peace of mind. Believe it or not, current 5-year and 10-year ARMs carry higher interest rates (3.31% and 4.55%) than long term fixed-rate mortgages, so there’s no economic benefit in taking out or keeping an ARM.
Practice Debt Savings
Interest rates have also dropped on practice and office building mortgages, though they remain slightly higher than home mortgage rates. We’ve helped some of our clients obtain office building financing and practice-related loans at rates as low as 3% recently; however, these rates are fixed normally for only a 5, 7, or 10-year period of time. So, if you have any practice or office building debt at rates at 4% or higher, it’s time to refinance those as well.
Paid off your personal residence but still have higher interest rate practice loans? If so, consider taking out a home mortgage in the amount of the practice debt and loaning the proceeds to the practice to pay it off. Thereafter, the practice can simply make the mortgage payment directly to the bank and deduct the interest expense on its tax return under the interest tracing rules. This can provide tremendous interest rate savings over the life of the loan.
John K. McGill, CPA, MBA, JD
John K. McGill, CPA, MBA, JD is a nationally prominent tax attorney and CPA who has specialized in dealing exclusively with the dental profession for more than 30 years. He is President of John K. McGill & Company, Inc., Editor of The McGill Advisory newsletter and shareholder in the law firm of McGill and Hassan, P.A. He is a member of the American Bar Association and the American Institute of Certified Public Accountants.
This article was reprinted with permission from The McGill Advisory, a monthly newsletter with online resources devoted to tax, financial planning, investments, and practice management matters exclusively for dentists and specialists, published by John K. McGill & Company, Inc. (a member of The McGill & Hill Group LLC). Visit www.mcgilladvisory.com or call 888.249.7537 for further information.