Dear Dr. Don,
I am currently five years into a 20-year, fixed-rate mortgage at 5.65 percent. I am looking at refinancing using one of two options. Option 1 is to take out a 15-year mortgage at 4.45 percent. Option 2 is to take out a 30-year mortgage at 4.85 percent.
I am nearing retirement and may not live in the home for more than seven years. I do have other credit card debt. I itemize my taxes, and I'm in the 28 percent tax bracket. Which option makes the most sense?
-- Conflicted Ken
Taxes shouldn't be the tail wagging the dog on the decision to refinance. If you want to maximize your tax deduction, stay in your current mortgage at 5.65 percent. Sounds silly, doesn't it? What you want to do instead is to minimize the total interest expense, after-tax, over the time you expect to be in the house.
The report function on Bankrate's "Mortgage tax deduction calculator" will let you lay out the alternatives, including staying in your existing mortgage, and will report the interest expense by year.
You didn't provide the particulars, but because you can afford your current mortgage and that has 15 years to run, I'd lean toward replacing it with the 15-year mortgage. It should minimize your after-tax interest expense over the next seven years you expect to be in the house.
Your tax professional can help you to put a finer point on this decision. It would be worth a consult if you're still conflicted about which path to take.