March 29, 2012
Mortgage Refi Dilemma: 15 or 30 years?
My mortgage broker is a patient man.
I kept changing my mind, because this refinancing was about so much more than whether to go with a 15- or a 30-year fixed rate. Now that the loan is about to close, I worry that I made the wrong decision.
As a baby boomer, all financial decisions suddenly spin around retirement. Many boomers now own their homes free and clear. I am not one of them, and it seems critical to get this refinancing right, since mortgage interest rates may not hit these historic lows again for a long time. For this reason, and because house prices have plummeted, the 15-30 dilemma may prove important for cash-strapped, first-time homebuyers too.
“I don’t think [rates] are going to race up in the next 6 months, or even year and a half, but things are definitely headed upwards,” predicted Susan Honig, owner of Veritana Financial Planning Inc. in Burbank, Calif. “And after that I think rates are going to fly.”
My goal was always clear: I want to be mortgage free in retirement. The cold tradeoffs are crystal clear. The muddy part came when grappling with my individual financial weaknesses and figuring out whether 15 or 30 years is a better fit.
“That’s why I spend a lot of time with my clients asking them, ‘Why are you thinking that?’ ” said Connie Stone, president of Stepping Stone Financial in Chagrin Falls, Ohio.
Stone said her inquiries are just as important as analyzing clients’ numbers. Their issues include fear of job losses, cash-flow crunches, credit card problems, and poor discipline. And some clients don’t like having any debt – even though it’s smart to have a mortgage just for the tax deduction.
Here are the facts. A 15-year loan gets paid off faster but the monthly payment is higher; a 30-year mortgage with a lower payment provides the flexibility either to invest the extra cash or pay off the loan faster.
Joe Alfonso, the founder of Aegis Financial Advisory LLC outside Portland, also noted that tens of thousands can be knocked off of the loan’s lifetime cost by investing the savings from the lower payment on a 30-year loan. He also likes the 30-year option, because it has “the flexibility of not having to pay a higher payment per month, given all the uncertainties in life.”
The problem is that I’m not that disciplined. If I have extra money, I might spend it. If any baby boomers are just returning from another planet and haven’t heard: now is the time to save, save, save.
What could possibly unhook me from the horns of my dilemma?
After changing my mind three times on my poor broker, Tom Digan, I landed on 30 years. I’ll be able to refinance my existing 5.5 percent fixed loan into a 30-year at 4.125 percent, saving nearly $500 a month. I’m not sure I have the discipline to save all of it every month.
But, for inexplicable reasons, I could imagine making, say, four of the six extra mortgage payments a year that Digan said would pay off my loan in 15 years.
The question remains: Will I do it? Will the pressures of impending retirement be enough to prevent, say, a splurge trip. We will see.
I hope you’ll share your refinancing dilemma by sending in a comment below.
As a financial planner, I advise my clients to pay off their mortgage before 65 or retirement. But for many, that just isn’t possible. In that event, go for the 30-year. You’re essentially paying rent, but it won’t go up and you can’t get evicted. (And I never count the interest deduction as a benefit; it’s overrated and may go away!)
If I was young and could afford the higher payment, the shorter-term financing makes the best long-term sense. But someone 55+ might consider sticking with a 30- or even 40-year loan and institutionalize the debt at the smallest possible rate. If you know you will probably never pay off the loan in your lifetime, making your payment as small as possible can make sense too.
Assuming a 25 percent tax deduction for the entire 30 years is a very bad idea. Typically in later years, the mortgage interest is a very small part of the payment.
It’s relieving to hear that people are thinking that they DO want to be mortgage free in retirement. As a geriatric social service, that is working to help older adults maintain their independence, too many bit the bait and gobbled up home equity loans. Today, they are in a financial mess.
They are over income for subsidized housing, have bad credit, and need rental housing that they can afford.
Sue Daugherty, Director
Serving Our Seniors
I would go for 15 years!
Great article, Kim. I enjoyed reading it.
I think most people will not pay extra on a 30 year loan. A 15 year term forces you to consistently pay down the balance.