Q: During the debates about the Federal Budget deficit, there was a lot of talk about eliminating the mortgage interest deduction. I'm thinking of refinancing, but now I'm wondering if it would be better to wait till they decide whether to eliminate that deduction or not. After all, how can I accurately assess the impact of refinancing if I don't know whether or not the interest will remain deductible?
A: I appreciate your interest in calculating the possibilities as accurately as possible, but I don't think you should wait. Here are a few reasons:
- Given the glacial pace of progress in Washington, you may have a long wait before the budget issue is resolved. The longer the debate drags on, the more you risk interest rates rising and taking away your refinancing opportunity.
- You could always figure out both scenarios to see how much of a difference it would make. This would essentially be a two-step process:
- First, run your current mortgage and one at today's interest rates on an amortization calculator. The figures that result would apply if the tax deduction were eliminated.
- To see how the numbers would compare if the tax deduction isn't eliminated, take the interest you would pay next year from the amortization schedules resulting from each set of calculations. Substitute those interest figures for the interest deduction on your most recent tax return, and see what effect this would have on your taxes. You can then adjust the mortgage payment differences accordingly.
- Chances are, eliminating the deduction would only help the case for refinancing. Unless you significantly lengthen the remaining term of your loan, refinancing should reduce your interest expenses. This would mean a lower deduction, but that wouldn't matter if the deduction were eliminated.
The bottom line is that you probably have more to lose by missing out on low mortgage rates than you do from the possibility that they might eliminate the mortgage interest deduction.