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.
Regarding the woman who wanted to refinance to a 15 year loan, why didn’t you present the benefits to keeping the low interest and low payments available on a 30 year loan, and invest the difference? In 30 years the house would be paid off, but there would also be a pot of cash available it the difference were invested in a diverse portfolio. Too many people make the emotional decision that a paid off house if necessary in retirement, then they end up having no cash when they might need it…
You’re right that when cash is tight, keeping a mortgage can make sense. Given her teacher’s pension, other savings and desire to pay off the home faster, the 15-year loan is a reasonable option. The faster payoff schedule also means she can turn around and tap more of the equity in the unlikely event she needs a reverse mortgage later in life.