With mortgage rates at record lows, does it make the most sense to refinance a mortgage and pay it off before retirement, or to simply expedite payments in hopes of paying the current debt off more quickly?
The answer isn't obvious and it's worth doing some calculations as part of your retirement planning.
Let's say you have a $200,000 mortgage on which you owe another 15 years at 6.5 percent. You'll be retiring in a few years and would like to be debt-free.
You can refinance the mortgage at 3.75 percent for 10 or 15 years. Closing costs are likely to be at least $2,000, possibly twice that.
Or you can expedite payments on the loan and pay it off faster -- no closing costs and no obligation to pay if you should run into a financial setback.
Which makes the most financial sense? Check it out with Bankrate.com's mortgage calculator.
Scenario No. 1:
You've been paying steadily for 15 years and you still owe 142,098 in principal. You've also paid $157, 223 in interest. At this point, you have enough equity to refinance the property without putting any cash into the deal and you have excellent credit and qualify for a 15-year mortgage at 3.75 percent with only $2,000 in closing costs. Your monthly payment drops from $1,264 to $1,033. Your total interest charge over the next 15 years is $43,908. When you add the interest charges together, you get $201,131. If you had simply paid off the loan over 30 years at 6.5 percent, you would have paid $255,085 in interest, so this refi saves you $53,954. That appears to be a pretty good deal, especially for someone with a few years to go before retirement.
Scenario No. 2:
But let's suppose that you aren't in a position to refinance. Lots of people aren't these days because their credit isn't so great, or their equity has dropped and they would have to put a lot of cash in the deal in order to get a low rate or even to qualify. In this case, it could be very smart to expedite your mortgage payments. If you can add $300 per month to your payment beginning at 180 months, you'll have the debt paid off in 10 years and cut your interest to $229,417 -- $25,668 less than you would have paid.
This isn't quite as good as the refi deal, but it saves you money and you'll thank yourself once you are retired when it is likely that there is no tax benefit to paying mortgage interest.
Scenario No. 3:
Great Aunt Josie dies and leaves you $50,000. You apply the $50,000 to your 30-year, 6.5 percent mortgage halfway through. Your total interest will fall to $200,053, about $1,000 less than you would have paid for the refi and you are debt-free in 8 years. A very good deal if you can swing it.
Financial journalist Jennie L. Phipps writes about retirement planning from the viewpoint of a baby boomer who is as concerned about retirement issues as most others of her generation.