Ask Dr. Don By Don Taylor, Ph.D., CFA • Bankrate.com

Keep investments or pay down mortgage?

Dear Dr. Don,
I am curious.  I have $145,000 left on my mortgage, which has 24 years left at a 6.5 percent rate.  I have investments of about $100,000, and when I retire I will get a lump sum payment after taxes of about $40,000. I can retire in three years and receive about half my salary.  Unfortunately that won't be enough to make my current mortgage payment and meet my other needs. My question:  "Would I be helping myself if I sell my investments, and use the money to refinance at a lower rate for 30 years (which I could afford) or do something else?"
Don "More Money" Down

Dear Don,
You're experiencing the classic conflict between having a "nest egg" to fall back on and meeting the cash flow needs of your household budget in retirement.  If you use your investments to pay off your mortgage, you free up cash in your monthly budget but lose the financial security of having that reserve.

Refinancing your mortgage to extend the loan term and reduce the interest rate will realize some cash flow savings. 

The unfortunate part of the equation is that by extending the loan term, you'll wind up paying about $24,000 more in interest expense as shown in the table below:

And that doesn't include the closing costs on the refinancing! You'll free up $132 a month over the next 24 years, but extend your mortgage payments out to 2033.  You can use Bankrate's refinancing calculator to estimate how many months it will take you to recoup your closing costs. 

If you're going to refinance, you want to do it prior to retiring.  So now's not a bad time to consider refinancing.  Using $40,000 of your investments to reduce your loan amount to $105,000 will free up about $370 a month and reduce your interest expenses over the life of the loan by about $21,000 as show below:

Allow me to state the obvious by saying that if you expect to downsize or move shortly after you retire, then these financial arguments for refinancing don't make any sense.  If the payback period on the refinancing is 30 months and you plan to retire in 36 months and move shortly thereafter, then don't go through these financial gyrations in an attempt to free up cash in your retirement budget.