Q&A: Factors to consider for refinancing into a 15-year mortgage

Dear Liz: I am considering refinancing my home from a 30-year mortgage to a 15-year loan and wondered if it would be a wise decision. I am 57, divorced and make a little over $100,000 a year as a high school teacher (and I plan to keep working until at least age 65). Other than a car loan, I have no debts and an excellent credit rating. I will receive a pretty decent teacher’s pension and I have about $150,000 in mutual funds in retirement accounts. I can afford the larger payment on a shorter loan. Do you think this would be a good move for me?

Answer: For most people, a 30-year mortgage is a good option. People can always make extra principal payments to pay down the loan faster, but the lower monthly payment is easier to handle if they face financial setbacks such as a job loss.

Your employment situation seems pretty stable, though, and you’re in good shape with a pension plus savings. If you can swing the payments, you’d be building equity much faster and while paying less interest. You’ll still have home debt into your 70s, which isn’t ideal, but it’s certainly better than having a mortgage in your 80s.

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Thursday’s need-to-know money news

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Q&A: Reverse mortgage due when borrower dies

Dear Liz: I was laid off from my job this year and decided to move in with my widowed dad in the suburban home that he and my mother purchased outright in 1989. However, over the years they apparently took out a reverse mortgage with a current balance of about $500,000 (the house was recently appraised at $680,000). When my father dies, how much longer can I live in the house? If there is little or no equity left, can I walk away from the house and let the lien holder handle the sale?

Answer: Reverse mortgages, which allow people 62 and older to tap the equity in their homes, are due and payable when the borrower dies, sells the home or moves out. You won’t be expected to vacate the premises the day after he dies, but you typically would have to leave the property within six months. You may be able to get an extension of that time if you’re selling the house or trying to get a loan to pay off the mortgage.

If there is still equity left in the home, it might make sense for you to try to sell it yourself to get the maximum value. Lenders only want to recoup what they’re owed and aren’t required to go to any extra effort to maximize the amount going to the heirs.

If the home is worth less than what’s owed, you can do a “deed in lieu of foreclosure,” which essentially allows you to hand over the keys and walk away. The good news is that you’re not on the hook. Reverse mortgages are non-recourse loans, which means that the lender can’t pursue the estate or the heirs for the balance owed.

Q&A: Invest or pay down mortgage?

Dear Liz: I usually finish the month with $1,000 to $2,000 left over after expenses to invest. My savings are with a money manager who has conservatively invested in a diversified portfolio. Given the uncertainty of the market, does it make any sense for me to start using that monthly excess to pay down the balance on my 15-year mortgage rather than continue to invest? The mortgage has about 91/2 years to go with a balance of just under $75,000. One added point: I would like to retire in about five years.

Answer:
It’s time to talk to a fee-only financial planner who can review your entire financial situation and offer personalized advice. The planner can give you a better idea if you’re really on track to retire within five years. If you are, then paying down the mortgage may be an excellent use of the money. Having a paid-off home will reduce your monthly expenses, which in turn can reduce how much of your retirement funds you’ll need to tap.

Before you prepay a mortgage, though, you should make sure all your other financial ducks are in a row. In addition to saving enough for retirement, you should have paid off all your other debt, accumulated a decent emergency fund (at least six months’ worth of expenses) and be properly insured.

Wednesday’s need-to-know money news

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