Dear Liz: We have a second home close to a lake that we bought in 2002 for $370,000. It could have sold for $1 million at the peak of the market but is now worth about $800,000. We owe $100,000 on a mortgage with four years left until it’s paid off, but the payments are a hardship and barely manageable. I don’t expect prices in the area to improve much in the next several years and they may decline more. Since I could sell the house now and get back all the money I ever put into it, I figure that every dollar I pay on it from now on is a dollar of profit burned. Selling the house is not an option, though, as my wife is adamant about keeping it. We are 10 years from retirement and have a kid to put through college. Our income is just under $100,000, we have no other debts and our primary home is paid off. Should we refinance the remaining balance to a 30-year loan, or just grin and bear it until the payoff in a few more years?
Answer: If you’re on track saving for retirement and your child’s college education, then the smart thing would be to gut it out and get the property paid off. You’re so close to the end of this loan that the majority of your payments go toward principal. Refinancing might lower your payments, but would dramatically increase the amount of interest you’d pay over time.
If you’re stinting your savings, though, the math gets more complicated. You could view the paid-off vacation home as an asset you could tap later for retirement expenses or college. In that case, getting it paid off on the current schedule would make sense. If selling or borrowing against the home in the future isn’t an option, though, then lowering your payments so you can save for your other goals starts to make some sense.
If that’s the option you choose, consider a 15-year loan rather than a 30-year loan. The shorter loan will still dramatically reduce your payment but you’ll pay about 60% less interest over time.