Beware of the Tax Cost of Turning Your Primary House into a Rental Property

Beware of the Tax Cost of Turning Your Primary House into a Rental Property


Since the financial downturn and real estate crisis in 2007–09, residential real estate in many parts of the country has seen a significant increase in value. This increase has created additional considerations for homeowners deciding if they want to sell an existing property or convert it into a rental.


Rental properties are taxed differently than personal residences. In some cases, these can make it tempting to move into an existing rental property for a few years to reduce the taxable income on the sale.


Homeowners also need to be mindful of the reverse—how the decision to turn a primary house into a rental property can be a poor tax move.


Tax Benefits When Selling Your Personal Residence


Since 1997, homeowners have been able to use the Section 121 exclusion to exclude up to $250,000 of gains from taxation ($500,000 if married filing jointly) upon the sale of a property. In order to qualify, the taxpayer must own and use the property as a primary residence for two of the past five years. Notably, these two years do not have to be the most recent two years. A taxpayer could live in a property from 2017–2019 then sell the property in 2021 and still qualify.


Example 1: Jolene and Max purchased their house in June 2011 for $400,000. They sell in June 2021 for $850,000. Because their total gain is less than $500,000, none of that gain needs to be reported as taxable income when they sell their property.


Example 2: Luke and Jenny purchased their home in June 2011 for $400,000. They sell in June 2021 for $1,050,000. Because their gain is $650,000, they will need to include the $150,000 above the $500,000 exclusion in their income. This $150,000 will be taxed at long-term capital gains rates. (NOTE: If Luke and Jenny did significant renovations, those costs can potentially be added to the $400,000 purchase price, reducing the taxable income.)


Understanding the Tax Impact of Turning Your Primary House into a Rental Property


When deciding to move into a new house, homeowners often have two options for their existing property: they can sell it or turn it into a rental property. While turning a primary residence can offer the appeal of receiving monthly rental income, turning your house into a rental property can have a significant tax hit come tax time if you decide to sell.


Example 3: Jolene and Max from Example 1 decide in June 2021 to turn their house into a rental property rather than sell. After 2 years, they decide they would rather not be landlords and sell the property in June 2023 for $850,000. Because they lived in the house as their primary residence for at least two of the last five years, they still qualify for the Section 121 exclusion. In fact, because the rental period happened after they lived in the house as their primary residence, they don’t even need to prorate the gain between periods of qualifying and non-qualifying use as they would if they moved back into the rental property. The only income to be reported is the recapture of any depreciation that was taken during the rental period.


Example 4: Jolene and Max from Example 1 decide in June 2021 to turn their house into a rental property rather than sell. In this case, they keep it as a rental property for four years before selling the property in June 2025 for $850,000.

When they sell their house in June 2025, it was only used as a personal residence for one of the past five years. They no longer qualify for the Section 121 exclusion. The entire $450,000 gain will be included in their taxable income. They will also have to recapture any depreciation that was taken during the rental period.


Jolene and Max’s decision in Example 4 to rent their house for four years before selling it has resulted in a significantly higher tax bill than they would have had if they sold it immediately or if they had sold it after only a few years of renting out the property.


Planning Opportunities for Real Estate that Was Converted into a Rental Property


There are several planning opportunities that owners might consider if they are in Jolene and Max’s situation described in example 4. These include:


  1. Moving back into the property to re-gain the exclusion
  2. Continue renting out the property until qualifying for a step-up in cost basis
  3. Consider a Section 1031 exchange into a different rental property
  4. Sell the principal residence and purchase a different rental property


Move Back into the Property to Re-Gain the Exclusion


Individuals can move back into the rental property to regain some of the exclusion.


Example 5: Tina and Troy purchased their house in June 2011 for $400,000. They turned it into a rental property in June 2015. In June 2019, they want to sell the house. Because it was a rental property for the past four years, all gains will be included in taxable income.

They decide to move back into their house in June 2019 and sell it in June 2021 for $850,000. They now qualify for the Section 121 exclusion because it was their primary house for at least two of the last five years.


When they sell their house in 2021, it had six years of qualified use as a personal residence and four years of non-qualified use as a rental property. The $450,000 of gains will be prorated between $450,000 x 60% = $270,000 that can be excluded and $450,000 x 40% = $180,000 that cannot be excluded.


Also, all depreciation that was taken during the four years as a rental property will be included in taxable income when the house is sold.


By moving back into their rental property for two years, Tina and Troy were able to exclude some, but not all, of the gains from the years they owned the property.


Continue Renting Out the Property Until Qualifying for a Step-Up in Cost Basis


Currently, when the owner of an asset dies, that asset gets a complete step-up in cost basis. Any gains that might otherwise have been included in taxable income are erased, and the cost basis is “reset” as if the taxpayer purchased the asset on the date of death.


Example 6: Tina and Troy from Example 5 don’t move back into the house in 2019, but they instead continue to rent it out. They live in Washington, and Troy is in bad health. Troy dies in June 2021 when the rental house is worth $850,000.


Tina receives a complete step-up in cost basis. It is now treated as if she purchased the house for $850,000. If she sells the house for $850,000, there is no taxable income, regardless of whether it is a personal or a rental property.


The example above assumes Troy and Tina live in a community property state like Washington (or California, Texas, or several others). If they live in a common law state, they likely would not receive the full step-up in cost basis described. Also, owners of rental properties receive a step-up in any depreciation taken in addition to the capital gains, providing an even more powerful tax benefit.


Consider a Section 1031 Exchange into a Different Rental Property


If a taxpayer no longer wants to rent out their current property, but they are willing to have a rental property, they can defer taxes with a Section 1031 exchange into a new rental property. The taxpayer can sell one rental property, purchase a new rental property, and transfer the cost basis. This will delay any taxes until the new rental is ultimately sold.


This 1031 exchange is a complicated process that requires working with a broker who specializes in it. This exchange can only be done with rental properties. It cannot be used to turn a rental property into a new primary house.


Sell the Principal Residence and Purchase a Different Rental Property


The final strategy to consider is to sidestep the issue altogether. If the taxpayer is moving out of a principal house and wants to own a rental property, it may be more tax efficient to sell the principal residence then purchase a different rental property.


By selling the principal residence before turning it into a rental property, the taxpayer can exclude all gains up to the $250,000 or $500,000 maximum of the Section 121 exclusion. Then the new rental property can be purchased and managed with a “reset” higher cost basis.




When moving out of a house, it may be tempting to turn that house into a rental property. There may be benefits to receiving increased cashflow that a rental can provide.


However, if you have a property with significant appreciation, consider carefully any decision to rent it out when you leave. This decision to rent out the property may give up far more in tax benefits than are received in new rental income.


If you’d like to understand the right approach for you, contact the Merriman team to strategize the decision to rent or sell your property while remaining mindful of the big picture.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Downsizing? Tips for Getting the Best Property Size

Downsizing? Tips for Getting the Best Property Size


Downsizing has been a rising trend among retired and almost retired Americans. But the drama last year due to the pandemic has caused younger Americans to rethink their priorities.

Decade-high unemployment figures, soaring healthcare and health insurance costs, and loneliness have forced a fifth of adults to move homes. Many have made significant decisions about their careers, lifestyles, and relationships.

Americans are rethinking what they value and how they want to spend their precious moments.

Is your monthly mortgage tab far too high? Do you think your family could be just as comfortable in a smaller place (no matter your age)?

You are not alone. Millennials prefer better lifestyles to humongous homes. If you are about to retire and want to make the most of your golden years (paying fewer bills and being around people, not empty hallways or dusty furniture), read on. These tips will help you make the most from downsizing.


What is downsizing anyway?

When you move to a smaller home to cut down on the upkeep and mortgage costs, you are downsizing. This change is often associated with retirees or those who are approaching retirement age. But a growing number of younger professionals are opting for a more fulfilled life—as opposed to more square feet.

Candidates for downsizing often do not have a large retirement nest egg and have smaller families.

Although downsizing should help you cut down your costs, that’s not always the case. Soaring demand for homes due to dwindling mortgage rates has triggered a 9.5% increase in prices. Downsizing the square footage of your home may not always result in lower bills. Therefore, you should think and research before executing such a plan. These tips will help you make a more fulfilling choice.


Be smart when downsizing

Smart downsizing means ensuring the move results in maximum rewards for your goals. Accordingly, you need to figure out your goals first. Consider how downsizing will affect your cost of living and healthcare. After you take in the considerations and make the calculations, consult the experts and make your move.


Figuring out your goals

Oftentimes the goals for downsizing focus on improving your financial state and maintaining or enhancing your lifestyle.

Transamerica did a survey and found that more than 50% of retirees consider cost of living and proximity to family and friends as the most critical factors when choosing where to live. Nearly 40% considered healthcare as the most important.

Concerning financial goals, the objective is to access as much equity as possible or maximize savings on monthly mortgage payments.

As for lifestyle goals, the objective is to minimize any adverse impacts on family and ensure access to services, amenities, and quality healthcare.

What impact will downsizing have on your finances and your lifestyle?


Think about how downsizing will affect your expenditure

Reach out to a financial advisor for an objective review of how the move will affect your financial status. Darren Robertson, a real estate agent at Northern Virginia Homes, explains, “A cost reduction of $500 per month in a 15-year, $200,000 mortgage at 4.5% could slash four years from the term and save you $25,000 in payments.”

Downsizing can also help you cut down on living expenses. How much do you spend on groceries, travel, and other services? If changing towns is not out of the question, use this calculator by CNN to estimate how your cost of living would shift.


What about healthcare?

If you are about to retire or are retired, consider health costs separately.

Although most Americans 65 years and above are enrolled in Medicare, you should brace yourself for a “health cost gut punch.” Retirees in America incur healthcare costs averaging $122,000 between the age of 70 and death.

Worse still, the inequalities of healthcare services in the US are no longer a myth—the pandemic just made them more apparent.

Look for ways to boost your Health Savings Account and make the most of it. Also, consider where you can access high-quality, affordable healthcare.


Consult the experts

Perhaps you are not so proud of some of the moves you made when acquiring your current home. This could be your chance at redemption.

Remember, this is for the long haul. You want to clinch a great deal that is not too far away from family, friends, and opportunities.

Scope the real estate market and reach out to a couple of agents. Find out what they think about the market and about selling your home and downsizing. Also, enquire about smaller homes in the market. If you find some that you like, ask the right questions about them, keeping in mind how much you want to save.

Experienced professionals will help you identify the best options for low-priced homes in your preferred locations. They can even recommend excellent new spots based on real estate projections and trends. They will help you to:

  • Evaluate your financing options.
  • Negotiate great deals amidst stiff competition.
  • Save on taxes and offer practical ways you can cut down your costs.


Commit to substantial downsizing

Don’t wait until after the move to start downsizing your belongings. Start to declutter as soon as you make the decision, beginning with smaller items.

Take photos of those kindergarten crafts by the kids (who are all grown up now) and keep the memories in the Cloud. Donate or have a garage sale for old furniture and any other antiques you’ve not touched in ages.

The more you visualize yourself in a smaller space, the more likely you will make it happen.


In conclusion, when downsizing, the best property sizes are not always the least in square feet. They are the properties that offer an opportunity to maximize your financial and lifestyle goals. These tips will help you to make smart decisions in this area.



 Written Exclusively for by Madison Smith

Madison Smith is a personal and home finance expert at She works to help others make positive financial stride in their lives by providing expert insight on anything from credit card debt to home-buying tips.



Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.






What Questions Do I Need to Ask a Seller Before Buying a Home?

What Questions Do I Need to Ask a Seller Before Buying a Home?



As you know, buying a new home is one of the most important financial decisions you will ever make in your life, which is why it’s vital to get it right.

You’ve heard horror stories before. A young couple buying their dream home only to find out six months later that the house’s structure collapsed due to water damage. Or the first-time buyer who gets caught up dealing with a probate attorney because someone was trying to sell an inherited property before the probate process had finished. Yikes.

No matter how confident you are that the house you’re about to buy is the perfect one for you, it’s always wise to ask as many questions of the seller as possible to make sure you’re getting exactly what you paid for, without any nasty surprises. With that said, let’s take a look at some of the questions you need to ask before buying a home.



How long has the house been for sale?

It’s an almost clichéd phrase that nearly feels like you’re trying to strike up some awkward small talk, yet it’s a very valid question indeed. Knowing how long the house has been for sale is essential to all buyers for several reasons.

Firstly, it gives you a clue as to whether or not the house is reasonably priced. If the property has been on the market for too long, it’s usually an indication that the seller valued the home too high, and you should be able to negotiate down.

Secondly, if the house has been for sale for a while and seems reasonably priced, there’s probably a reason why. While it’s not a major red flag, it’s certainly a cause for suspicion, so keep your eyes peeled and maybe solicit the opinion of an extra property inspector.


What is the reason for the sale?

Another obvious yet essential question. You need to know why they are selling the property. Are they downsizing? Pursing a new job in a different city? Moving to a retirement home? It’s all valuable information that you can use to bargain with later. Also, there’s a chance the seller is leaving due to a problem in the area, such as an annoying neighbor or something of the sort.


What is included in the sale?

When viewing a property, you need to ask what is included as part of the sale and what isn’t. After all, the seller will probably be taking most of their stuff with them, so you should be aware of what the house will look like once they are gone and what you need to bring with you when you first move in.


Are there any natural hazards or dangerous substances?

This is a great question that people forget to ask. It’s always wise to enquire about any hazards that are lurking in and around the house. If this house is in a potential flood zone, you need to know about it.

In addition to this, the seller should inform you about any harmful and toxic materials in the property, such as asbestos, lead paint, and even faulty wiring that could be classed as a fire hazard. They are required to disclose these things by law, but it doesn’t hurt to ask.


Is the house in probate?

Sometimes people are looking to sell an inherited house, and they usually want to get it done in a hurry. However, probate is an obligatory process that must be carried out in full; there’s no going around it.


The pros and cons of buying a probate house

On the one hand, buying a probate house is an excellent thing because usually it means the price is much lower, as the beneficiaries typically want to get rid of it as soon as possible. This gives you an excellent opportunity to secure a massive profit on the property right out of the gate—and if you wanted, you could even renovate it and flip it for a handsome profit.

However, there are downsides. The probate process is very time consuming, usually taking weeks, months, or even years. If you decide to buy the property, just be aware that you could be in for the long run, and there’s nothing you can do about it. In addition to this, it’s typical for a probate home to be in a below-average condition as most of the previous owners are generally elderly.

This means there is a higher likelihood that the home has fallen into a state of neglect, and things may not be up to code. If they aren’t, that means an added cost for you. The best advice is to hire property inspectors to assess the structure and the electrical and plumbing systems before you sign on the dotted line.


Would you consider an offer?

Last but not least, the most important question of all: “Would you consider taking $…?”

In other words, ask for a deal. Negotiate. Barter! It’s probably the most significant investment you will ever make, so even if you shave 1% off the house price, that’s a ton of money saved.

Thanks for reading!


Written by: Mike Johnson | Exclusively for

Author Bio: Mike Johnson is a freelance writer and a human rights activist and an enthusiast. He is not employed or associated with Merriman. Through his extensive research and commitment to the field of law, Mike has established himself as a well-decorated writer in this field. Mike currently settles in Las Vegas, and loves starting his day with a shot of espresso and cycling through his neighborhood.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

Tips for Selling Your Investment Properties

Tips for Selling Your Investment Properties


Planning to list your investment property for sale?

Under favorable market conditions, selling your rental property could be lucrative. And you could also have properties in your portfolio that are not performing as you expected. In these cases, putting your investment property up for sale may be a smart step, explains T-Square Real Estate.

Selling this type of property comes with a set of unique challenges. When you plan and strategize in advance, you could save yourself a lot of time and money.

In this article, we’ll go over the top tips for selling your investment properties. By reading this piece, you’ll gain an understanding of the options you have for wasting less time and closing your sale more profitably.


Tip #1: Study the Market Situation

The first step before selling your investment property is conducting thorough research on the local market conditions. When you see great potential in how the market behaves, it’s important to communicate this to prospective buyers.

Map out the employment situation, occupancy rates, and the overall status of the rental market. Real estate investors would see more value in a property that is situated in a district with:

  • Low unemployment rates
  • High occupancy rates
  • Favorable rental conditions


Tip #2: Understand the Tax Laws

Taxes on rental property sales differ from residential unit transactions. You need to find ways of utilizing the US Tax Code (Section 1031) in a financially sustainable way.

Making complete sense of these laws is essential for preventing a negative return on investment. It’s possible to defer paying capital gains taxes if you know how to work the regulations to the advantage of your business.


Tip #3: Stage Your Rental Property

Maximize the appeal of your rental property by using the services of a professional stager. The difference in perception between staged and unstaged properties may be tremendous.

Here are the main benefits of staging your rental unit:

  • Depersonalization makes the property more appealing.
  • You’ll sell your property quicker.
  • Your stager will emphasize the key positive features of the rental property.
  • Prospects might perceive that your home has a higher value.


Tip #4: Reduce Your Investment Property’s Expenses

One way to make your investment property more attractive is by reducing the monthly operating costs. When the cash flow improves, your property gets an instant boost in investor appeal.

There are numerous ways to minimize operating costs. For example, you could upgrade all the major appliances in the unit. Even though this involves an initial expense, the resulting savings are bound to impress your buyers.


Tip #5: Find the Right Price

Selling your rental property calls for figuring out the correct price. You want to hit the right spot between too expensive and undervalued. Both of these extremes would work against your best interest.

The groundwork for successful pricing is a comparative market analysis. Without going through with this, you won’t know what the optimal price for your investment property is. This analysis aims to figure out what have been the recent sales prices for similar properties in the same area.


Tip #6: Provide High-Quality Visuals

Hiring a professional real estate photographer is the best approach if you want to have high-quality photos accompanying your listing. And there are plenty of reasons to provide these photos.

Your prospective buyers are more encouraged to visit for a showing when they see photos that showcase the property’s selling points. Plus, taking great photos of a property has the potential to sell your rental unit quicker and for more money.


Tip #7: Prepare All the Documentation

Investors want to see all the stats linked to your rental property. The most important documents are those that concern the financial health of your unit. Make sure that your prospects have ready access to the budget and expense sheets and income data.

Additionally, hand over complete documentation regarding maintenance and repairs history. This should include a complete overview of capital expenditures. Transparency builds trust and helps your potential buyers to make the final decision.


In a Nutshell: Selling Your Investment Properties

Quite a few investment property owners face a big question: should I sell my investment? In many cases, it’s a sound plan that allows you to make further investments or cash out because of necessity.

You can take action to sell your investment property more successfully. Here are our top tips for making a quicker and more profitable transaction:

  • Stage your rental property to improve its appeal.
  • Provide plenty of visual materials in the property listings.
  • Prepare all the documents, including the complete financial history.
  • Understand the market situation and its implications on your sale.
  • Conduct comparative market analysis to find the best price.
  • Study the tax laws and regulations relevant to your situation.
  • Cut the running expenses of your investment property.


Written for Merriman by Kellie Tollifson at T-Square Real Estate Services in Seattle.

What to Consider Before You Refinance Your Mortgage

What to Consider Before You Refinance Your Mortgage

For many people, a home is one of their largest assets. Also, because most people don’t pay cash to buy their home, they need to get a mortgage to finance the purchase. Even though a mortgage is typically 15, 20, or 30 years, that doesn’t mean everything stays the same during that time. What might be a great interest rate at the time of purchase could be considered a high interest rate just a couple years later. This is why millions of Americans choose to refinance their mortgage when interest rates go down. What’s important to keep in mind, though, is that there are many factors besides the interest rate that a homeowner should consider before refinancing. There are seven key considerations that one should review before applying for a refinance.

To help me understand what’s happening in the mortgage market, I reached out to my friend Phill Becraft. Phill is a mortgage advisor with Guild Mortgage and has more than a decade of experience in the greater Seattle area. Phill was able to provide insights into some of the key considerations outlined below.

Key Considerations

  1. Your Credit Score
  2. Refinancing Costs
  3. Home Equity
  4. Debt-to-Income Ratio
  5. Rates vs. Term
  6. Private Mortgage Insurance
  7. Break-Even Point


1) Your Credit Score

One of the biggest factors that lenders consider when evaluating an application is a borrower’s credit score. While current interest rates are at historic lows, that doesn’t mean everyone will qualify for these low rates. It’s helpful to know what your score is beforehand so that you’re not surprised when you apply for a refinance. A general guideline for getting the lowest mortgage interest rate is having a credit score of 760 or higher.

Tip from Phill Becraft:

“Online credit check companies are a great tool for consumer lending products, but in the end, they are a for-profit business. Don’t be surprised when a mortgage lender pulls your credit and it’s different by 20–30 points. Mortgage lenders use a more complex FICO scoring system for their reports to supply to their investors. It’s called FICO Score 9, and it’s on a different level than what is used at the online credit check companies.”

2) Refinance Costs (closing costs)

All borrowers should keep in mind that refinancing is not free. Even when lenders offer a “no-cost” refinance, that just means the rate will be higher to cover the costs of the refinance. Typically, a borrower should be prepared to pay 2%–6% of the total loan amount to refinance. That 2%–6% range should make it obvious that not all lenders are the same, and oftentimes it pays to shop around. If you’re worried about out-of-pocket costs, many lenders allow closing costs to be wrapped into the new loan—but you need to have enough equity in your home for this option to work.

Tip from Phill Becraft:

“If you refinance with your current loan servicer, you may not need to reestablish/rebuild an escrow account to ensure your property taxes and insurance are paid. This can lower your upfront or financed loan costs.”

3) Home Equity

If you want to refinance, then you should confirm that your home is worth more than the mortgage amount. The more the better, but a good target is at least a loan-to-value (LTV) amount of 80% or better. In other words, you should try to have at least 20% equity built up in your home.

Quick example: Home Value = $500,000 | 80% LTV = $400,000 | 20% Equity = $100,000

If your home is worth less than your current mortgage, that is considered “underwater.” When a home is underwater, your refinancing options are limited. Most conventional lenders won’t refinance a mortgage if the home is underwater, but a homeowner may be able to qualify with a government program. It’s always best to check with your lender first.

Another reason to have 20% equity is figuring out if you will be required to pay private mortgage insurance (PMI). We’ll discuss this more in a later topic.

Tip from Phill Becraft:

“Many conventional loans make you keep mortgage insurance for the first 24 months regardless if you have enough equity (20%+). Sometimes it’s best to look at a refi to get an updated appraisal to better your LTV or equity position.”

4) Debt-to-Income Ratio

Just because you currently have a mortgage, it doesn’t mean you can simply refinance into a new one. Lenders have not only increased their standards for credit scores, they’ve also become more stringent when it comes to your debt-to-income ratio. Ideally, your monthly house payments should be under 28% of your gross income, and overall debt-to-income should be less than 36%. This means you need to calculate how much your other monthly obligations are, such as car payments, credit card bills, student loans, and other credit lines when figuring out your total debt-to-income ratio. Having a steady job history, a high income, and some money saved are all helpful attributes, and some lenders may allow your debt-to-income ratio to go into the 40%+ range, but you shouldn’t count on that.

Tip from Phill Becraft:

“Childcare costs are not considered when looking at debt-to-income ratios. Also, some lenders can eliminate monthly liabilities like auto loans with less than six payments left.”

5) Rate vs. Term

Getting the lowest possible rate doesn’t always make the most financial sense. Many people looking to refinance put a lot of emphasis on the interest rate, but it’s also important to know the cost of getting lower rates. Make sure you pay attention to the refinancing points that are paid to get a mortgage at a lower interest rate. These points are either wrapped into the closing costs or added to the principal of your new loan.

Another way to get a lower interest rate is choosing a mortgage with a shorter term. A 20-year mortgage will typically have a lower interest rate than a 30-year mortgage. If your goal is to reduce your monthly payments, choosing a shorter-term mortgage will most likely result in a higher monthly payment. If your goal is to lower your monthly payment and pay off your mortgage faster, then you can refinance into a loan with a lower rate and the same term, but keep making the same amount you were paying on the previous mortgage. Let’s use an example:

Original Mortgage: $300,000 | 4.00% | 30 Year Term | Monthly Payment = $2,387

Refinanced Mortgage: $300,000 | 3.50% | 30 Year Term | Monthly Payment = $2,245

In the original mortgage above, the minimum payment of $2,387 is made every month for 30 years until the loan is paid off. Say you refinance into the new mortgage at 3.50%, but instead of making the new minimum payment of $2,245, you keep making the previous mortgage payment from the original loan, $2,387 per month. This strategy “feels” like your monthly payment hasn’t changed, but now your loan will be paid off in approximately 27 years instead of 30 years! You can save 3 years of mortgage payments by simply lowering your interest rate and sticking with your original monthly payment.

It’s important to note this simple example does not take into account closing costs, refinance points, or how long you’ve been paying into the original mortgage, but you should get the point that you can make payments above your minimum monthly payment. This strategy also allows you to reduce your monthly payments back down to the minimum amount during times that are financially challenging.

6) Private Mortgage Insurance

Most lenders require a borrower to have at least 20% equity in their home, otherwise private mortgage insurance (PMI) is required. Lenders will calculate your loan-to-value ratio during a refinance to ensure the mortgage amount will not exceed 80% of the home’s value. The costs for PMI vary and are typically 0.25%–2% of the loan balance per year. This means the higher the mortgage amount, the higher the PMI costs. For many homeowners, putting 20% down at the time of purchase is a big hurdle, so it’s not uncommon for PMI to be added to a mortgage. As home values increase, refinancing may be a way to eliminate PMI and get a mortgage at a lower interest rate. The opposite is also true, though. If your home has decreased in value, a lender may require PMI on a refinanced mortgage if the LTV exceeds 80%.

Tip from Phill Becraft:

“Did you know there are many ways to pay mortgage insurance? Gone are the days of monthly payments! You can choose “split” or “single” paid premium options with most mortgage brokers. Choose a small lump sum down and finance less each month (split) or just pay the single premium up front and don’t have any monthly MI costs!”

7) Break-Even Point

If you are considering refinancing your mortgage, you should at some point ask yourself, “Is it worth it?” This question cuts to heart of making this decision. Ultimately, you need to calculate if the costs to do the refinance will be paid off eventually by the monthly savings.

For example, if your refinance costs are $12,000 and you end up saving $400 per month, then it will take 30 months to “break even.” This means you should plan on staying in your current home for at least another two and half years, or you won’t end up saving anything by refinancing your mortgage.


Hopefully these seven considerations have given you enough “food for thought” to realize refinancing a mortgage is complex, and it’s not just about getting the lowest rate. Before you make the decision to start the process, I encourage you to speak with a professional who can help assess your financial situation and determine if now is the right time to refinance your mortgage. Here at Merriman, a Wealth Advisor can assist you with this decision as part of our financial planning process. Reach out today if you have any questions.

With the World Working from Home, How Can Real Estate Be a Good Investment?

With the World Working from Home, How Can Real Estate Be a Good Investment?


One of the most noted and real impacts of the coronavirus is that employees are working from home. While it has been a huge shift, four plus months in, the results have been positive for many, and headlines in business publications are examining whether a substantial fraction of these employees may never return to the office. There is solid debate about how big the impact will ultimately be, but there is no doubt that companies will be revisiting their spaces.

This trend might lead one to worry that real estate values will plummet as demand falls and supply stays constant. To this I would offer two counter points. First and foremost, commercial real estate encompasses a wide range of investments. The pie chart below shows the sub-sector breakdown of the holdings of our most widely recommended real estate investment, the Dimensional Global Real Estate Fund (DFGEX).

REITs that focus on office properties as of June 30th, 2020, made up just 12% of the fund’s allocation. Office REITs do not just own high-rise commercial office buildings in downtown cores. Much of the space they own is in suburban office parks and includes space leased by dentists, hairstylists, lawyers, and small research and engineering firms. While many more things can be done virtually, there are still many businesses, such as orthodontists and spas, that will always require an in-person experience.

While demand for some types of office space may be dropping, demand for other types of real estate in the fund is growing. As of June 30th, the top three holdings in the Dimensional fund were American Tower Corporation, Crown Castle International Corporation, and Prologis Inc. American Tower and Crown Castle are owners and providers of infrastructure for wireless communication and fall into the Specialized category. Prologis is in the logistics real estate business, leasing distribution facilities to support direct fulfillment to customers. All three of the companies are poised to see substantial growth from increasing demand. The fund owns many other businesses, from cold storage warehouses to multi-family apartments to medical facilities, where demand remains high.

The second point is that changes always follow any societal upheaval. There is no doubt that COVID will have an impact on our world. However, it is unclear that the shifts will be as radical as some are predicting or that COVID alone will cause the demise of industries or institutions. Large scale change rarely happens that quickly or dramatically.

For example, the idea that demand for office real estate will suddenly drop 60–70% seems overblown. IBM was an early proponent of telecommuting. In a 2009 report, they boasted that “40 percent of IBM’s some 386,000 employees in 173 countries have no office at all.” According to an Atlantic article from 2017, they unloaded 58 million square feet of office space at a gain of nearly $2 billion. By all accounts, it sounded like a winning strategy. Only, it did not work out, and in March of 2017, IBM decided to move thousands of its workers back to physical company offices.

The problem was likely a drop in what the Atlantic terms “collaborative efficiency”—or the speed at which a group successfully solves a problem. Physical distance still mattered when it came to team creativity, and remaining competitive in a rapidly changing landscape more and more requires novel solutions to complex problems. Offices may look different, but I believe that more than ever people and employees will need places to gather and connect.

The future trajectory is never clear even to the greatest minds. What is clear is that people will always need spaces to live, work, and conduct business. What those spaces look like will evolve, but companies are motivated to adapt. And historically, they have changed industrial warehouses and former malls into Amazon fulfillment centers and multi-family apartment complexes. Despite the recent drawdowns and changing landscape, we believe that investing in a diversified real estate portfolio continues to offer the potential for equity-like returns, current income, and solid inflation protection, all important elements of a well-balanced portfolio.