Q&A: Here’s a retirement dilemma: Pay off the house first or refinance?

Dear Liz: My husband and I are retired, with enough income from our pensions and Social Security to cover our modest needs, plus additional money in retirement accounts. We have owned our home for 35 years but refinanced several times and still have 15 years to go on a 20-year mortgage.

With rates so low, we were contemplating refinancing to a 15-year mortgage just for the overall savings on interest, but we started thinking about the fact that, at 67 and 72 years old, it’s unlikely that both of us will survive for another 15 years to pay off this loan. Since that’s the case, we’re now thinking about taking out a 30-year mortgage, with monthly payments $700 or $800 less than what we currently pay.

Our house is worth around 10 times what we owe on it, and if we had to move to assisted living we could rent it out at a profit, even with a mortgage. We also each have a life insurance policy sufficient to pay off the balance on the mortgage should one of us predecease the other.

I know that conventional wisdom says that we should pay off our mortgage as quickly as we can. But an extra $700 or $800 a month would come in handy! Am I missing something? Is this a bad idea?

Answer: Answer: Not necessarily.

Most people would be smart to have their homes paid off by the time they retire, especially if they won’t have enough guaranteed income from pensions and Social Security to cover their basic living expenses. Paying debt in retirement could mean drawing down their retirement savings too quickly, putting them at greater risk of ultimately running short of money.

Once people are in retirement, though, they shouldn’t necessarily rush to pay off a mortgage. Doing so could leave them cash poor.

You are in an especially fortunate position. Your guaranteed income covers your expenses, including your current mortgage, and you have a way to pay off the loan when that income drops at the first death. (The survivor will get the larger of the two Social Security checks. What happens with the pension depends on which option you chose — it may drop or disappear or continue as before.) Even with a mortgage, you have a large amount of equity that can be tapped if necessary.

So refinancing to a longer loan could make a lot of sense. To know for sure, though, you should run the idea past a fee-only, fiduciary financial planner who can review your situation and provide comprehensive advice.

Wednesday’s need-to-know money news

Today’s top story: Get your finances ready to refi your student loans. Also in the news: Watching out for COVID-19 student loan relief scams, complaints against financial institutions rise during the pandemic, and a beginner’s guide to employee stock plans.

Get Your Finances Ready to Refi Student Loans
You probably shouldn’t refinance most student loans until after Sept. 30. But you can get ready right now.

Don’t fall for COVID-19 student loan relief scams
Scammers are still working during the pandemic.

In the Pandemic, Complaints Against Financial Institutions Rise
Complaints are up over 31%.

A Beginner’s Guide to Employee Stock Plans
important basics you should know.

Friday’s need-to-know money news

Today’s top story: Would student loan refinancing pay off for you? Also in the news: How store credit cards can leave you unprotected, the newest workplace perk that looks a lot like a payday loan, and the best (and worst) tippers in America.

Would Student Loan Refinancing Pay Off for You?
The type of loan you have matters.

How Store Credit Cards Can Leave You Unprotected
Fewer protections could leave you vulnerable.

The newest workplace perk looks a lot like a payday loan
Checking the fine print.

The best (and worst) tippers in America
Not a good look, Millennials.

Q&A: Limiting your rate shopping window

Dear Liz: We’re planning to refinance our mortgage and are concerned about generating multiple credit inquiries which would lower our excellent credit scores. Is there some kind of licensed, bonded ethical middle-agent who could get just one official credit report from each of the three bureaus and then send it to all the lenders I designate? Our FICOs are so good that we want lenders to compete for our refi business but don’t want the process itself to lower FICOs just for inquiries only.

Answer: The FICO formula has you covered. With the FICO scores most lenders use, multiple mortgage inquiries made within a 45-day window are aggregated together and counted as one. Furthermore, any inquiries made within the previous 30 days are ignored entirely. That allows you to rate shop for mortgages without dramatically affecting your scores.

The FICO formula extends this “de-duplication” process to two other types of borrowing: auto loans and student loans. Only similar types of inquiries are grouped together, however. If you shopped for both mortgages and auto loans, then two inquiries eventually would be factored into your credit scores, rather than just one.

Credit cards, personal loans and other types of borrowing don’t get the same treatment. If you apply for two credit cards while shopping for a mortgage, you would have three inquiries — two that are immediately factored into your scores and a third that would be counted after 30 days had passed.

Also, some lenders use older versions of the FICO formula that have a shorter rate-shopping window — 14 days instead of 45. If you want to be absolutely sure your mortgage shopping has a minimal impact on your scores, you can limit your shopping to that two-week period.

Wednesday’s need-to-know money news

Today’s top story: Can’t refinance student loans? Try these tactics. Also in the news: 10-word answers to your biggest car insurance questions, 5 foods that raise blood pressure – and life insurance rates, and 5 ways to save on preparing your taxes.

Can’t Refinance Student Loans? Try These Tactics
Looking at the alternatives.

10-Word Answers (or Less!) to Your Biggest Car Insurance Questions
Short and sweet.

5 Foods That Raise Blood Pressure — and Life Insurance Rates
That burger could spike more than just your blood pressure.

5 ways to save on preparing your taxes
Keeping more of your money.

Monday’s need-to-know money news

Today’s top story: Determining the best way to do your taxes. Also in the news: Refinancing an FHA loan, what’s next for the stock market, and why now is the time to hunt for higher rates on your bank accounts.

Determining the Best Way to Do Your Taxes
Finding the way that works best for you.

FHA Streamline Refinance: 5 Strict Conditions
Meeting the tough requirements.

Trump’s in, Dow Hits 20,000: What’s Next for the Market?
Looking at the market under a new administration.

Now’s the time: Hunt for higher rates on your bank accounts
It’s a year of rising interest rates.

Tuesday’s need-to-know money news

financial-toolboxToday’s top story: 7 ways to improve your finances in 2017. Also in the news: How to help your kid graduate from college debt-free, how rising home values can boost your mortgage refinance, and why Americans are blowing it when it comes to personal finance.

7 Ways to Improve Your Finances in 2017
Making the most of the new year.

Help Your Kid Graduate From College Debt-Free
The greatest graduation gift of them all.

Rising Home Values Can Boost Your Mortgage Refinance
You could be able to tap your home equity.

Americans are blowing it on personal finance
Making financial literacy one of your goals.

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.

Q&A: Refinancing an education loan

Dear Liz: You were asked a question about whether it would be wise to refinance a parent PLUS loan through a private lender and you said yes because the interest rates are so much lower. Doesn’t this ignore the benefit of the IRS tax credit? I figured out that my interest rate is effectively a couple of percentage points lower because I get a $2,500 tax credit every year.

Answer: As long as you’re refinancing with another education loan, the interest is still tax deductible. The deduction is “above the line” — meaning you don’t have to itemize to get it. The student loan interest deduction can reduce your taxable income by up to $2,500 if your modified adjusted gross income is less than $80,000 for singles and $160,000 for married couples filing jointly. The amount you can deduct is phased out at higher incomes and disappears after $90,000 for singles and $180,000 for marrieds.

If you’re not clear whether you’re refinancing into an education loan (rather than, say, a personal loan), you should ask your lender.

To clarify, it’s not always a good idea to refinance, even if you get a better rate. That’s because federal education loans have consumer protections that private lenders don’t offer. For example, you can pause your payments for up to three years if you lose your job or have another financial setback. Private lenders may offer hardship deferments, but typically those max out at 12 months.

Thursday’s need-to-know money news

refinancingToday’s top story: Mortgage refinance options for people with bad credit. Also in the news: The best cell phone deals for July, steps to financial independence, and 10 personal finance headscratchers.

Mortgage Refinance Options for People With Bad Credit
Hope is not lost.

Best Cell Phone Deals in July
Time for an upgrade?

Five Essential Steps to Financial Independence
Step by step.

10 personal-finance headscratchers that show we’re irrational
Not thinking clearly.