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Dear Dr. Don,
After years of up-and-down jobs and income, we have finally come to a financial situation that cannot be fixed within our
means. We have tapped family, friends and our 403(b) and 401(k) plans to the max.
I need $25,000 to get out of debt and pay a small amount toward our son's college. Miraculously, we have always
made our house note and now are three years from paying it off. We only owe $24,000 on our house, but are eligible for a
cash-out refinancing and/or a home equity loan.
We are in our 50s -- I don't want another 30-year mortgage. What should we do?
-- Lynne Loan-Choice
Dear Lynne,
I can understand not wanting to refinance with a 30-year loan when you are so close to paying off your existing mortgage. It's
a great financial goal to have your home paid off before retirement.
There are plenty of options available to you that will allow you to accomplish your goal of tapping the home's
equity without signing up for another 30-year mortgage. But first, let me make the point that even with a 30-year mortgage, you
can make additional principal payments and pay the loan off sooner.
The amortization schedule on Bankrate's Mortgage payment
calculator lets you see how additional principal payments shorten the loan's life.
Your choices are a 15-year or 30-year fixed-rate mortgage, a home equity loan, a home equity line of credit,
known as a HELOC, or a 5/1 or 7/1 adjustable-rate mortgage. You want to try to minimize your interest expense over the time
you expect to have the loan outstanding. To do that, you need to know how much you can afford to pay each month in mortgage
payments.
Inputting the loan terms and the scheduled additional principal payments on Bankrate's mortgage payment
calculator can help you estimate how long it will take and the total interest expense. Roughly speaking, if you can afford
to pay off $25,000 in the next three years, you should be able to pay off a $50,000 loan in seven years.
A HELOC is an adjustable-rate loan, and you'll face interest rate risk if the rate adjusts higher. An ARM also
faces that risk, but a 5/1 or 7/1 ARM will have a fixed rate for the initial term.
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