Dear Dr. Don,

I am considering a home mortgage refinance. This is more financial planning than anything else. My wife and I are both 57 years old. We currently are four years into a 15-year fixed-rate mortgage at 4.625 percent, with a monthly payment of $972 and a loan balance of $97,500. Our long-term investments are on track, but we are having trouble building an emergency cash fund.

Does it make sense to refinance into a longer-term mortgage in order to build this fund? At current rates, we could start building a reserve at more than $400 per month. Our home is assessed at $240,000. Locking in that rate basically forever seems a good idea, knowing that if something happened to one of us we wouldn’t be forced into a sale or have to dive into long-term investments.

— Dave Debates

Dear Dave,

Assessed value doesn’t necessarily have anything to do with appraised value, and it’s the appraised value that will determine how much equity you have in your property. That said, let’s assume you’re in a solid position to refinance your mortgage.

You have a great rate on your existing mortgage — current rates are within 0.25 percent of that rate. So, I’m reticent to recommend you incur a couple of thousand dollars in closing costs to free up enough money in your monthly budget to build an emergency fund.

In addition, extending to a 30-year mortgage — or even another 15-year mortgage — will result in you spending thousands more in interest expense as shown in the table below:

Extended mortgage, increased cost
Existing New 15-year New 30-year
Loan amount $97,500 $97,500 $97,500
Interest rate 4.625 percent 4.45 percent 5.07 percent
Payment term (months) 127 180 360
Payment $972 $743 $528
Total interest $25,985 $36,308 $92,429
Difference in interest expense $10,323 $66,444

You could consider taking out a home equity line of credit to act as a financial backstop instead of refinancing to build cash savings. The closing costs on a HELOC should be a few hundred dollars, instead of a few thousand.

Alternately, you may have enough flexibility in your retirement accounts to borrow against them in a time of need. This doesn’t work if you lose your job, because the loan comes due when you separate from service. However, for other fiscal emergencies, this can work.

There is a low probability of you both losing your job at the same time. Therefore, if you each have the ability to borrow against your individual retirement plans, you can borrow from one plan in a financial emergency knowing that if the spouse who owns the account is laid off, the other spouse can repay the loan with a loan from his or her plan.

This can provide a measure of financial security without needing to refinance the mortgage to free up money in your monthly budget.

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