Mortgage Refinance and Retirement

[thatgirl]

I have been trying to convince my mom, for many years, to refinance her mortgage. The following information is based on rough information I've garnered from mom over the years and is provided to give adequate numbers to answer the question posed at the end.

The mortgage is about 12 years old and was originally about $135,000 @ 6.75% (30 yr fixed). The principal balance is roughly $94,000 currently. My mom pays extra on the mortgage every month - probably $100-$200/mo. The current value of the home is in the $250,000-$275,000 range.

Mom makes $100k/yr and currently contributes 10% (including employers match) to her 401K. I'm a little sketchy on how much money she actually has saved for retirement in her 401K; at a minimum she has $120,000 and probably no more than $300,000. Additionally, mom has another $350 - $400k she will receive in the next few years when her brother sells a house left to the two of them by their mother (I don't know what the tax implications are, so the number I've listed is mom's half, without any tax deductions).

Mom is 55 and would like to retire sooner rather than later. She will receive $1,200/mo from social security.

My question is this - would it be more prudent for mom to refinance only the $94k, thereby lowering her monthly payments going forward (30 yr or 15 yr?), or refinance a greater amount, take the money out and invest it? My mom is of the opinion that one should pay off their house as quickly as possible and then live in it until dead - is this sound thinking for someone in her position, based on the information I've provided?

And before anyone asks, mom has not always made $100k per year and raised 2 kids on her income alone, which is why she's likely "behind" on retirement saving.

[Deleted]

She should refi to get her rate down to around 5%. I don't think she should take any cash out and she can take out a 20 or 15 year loan if she doesn't want to extend the length of the loan.

If she needs cash during retirement should could always do a reverse mortgage.

[thyme4change]

She could probably get a 15 year fixed rate around 4.25% and her payments could go down a few hundred dollars. Even if she still wants to pay it off, she can leave her payment the same.

I don't advocate paying off mortgages such as this. I also don't advocate taking out money to invest. I'm a slow-and-steady wins the race type of person. A little towards the mortgage, a little towards savings.

But, there is no need for her to be paying all that extra interest - no matter what her choice is.

[TrixAre4Kids]

I'd refi that into a 15 year (or maybe even a 10 year) in a heartbeat.

[Deleted]

refi into new 30 year to give her some flexibility. She can pre-pay up to 20% per year w/o penalty. She should also look at 30 year adjustable fixed for 7 years. She might be able to get something in the high 3s.

[Gardening Grandma]

I'd definitely refi the balance at a 15 year loan. If the payments go down, she has the option of putting the difference on the principle. If she's 55, paying off her mortgage before retiring is a good goal. I would absolutely NOT pull out the equity to invest - that is basically borrowing money to risk losing. For someone who is looking at retiring, I think it's a bad idea.

What I'd really recommend is that she refi the bal for 15 years. Then take the money saved each month and put THAT into a retirement account.

[thyme4change]

Oh - I change my answer - what bonnap says! 30 year ARM, fixed for 7 in the high 3's.

She could either continue paying as she has been and it would be nearly paid off by the end of the 7, or she could pay the min and save the rest and see what the rate is in 2018. She would have nearly enough to pay it off if rates are very high, or she could just keep the money around and just keep on going.

[happytraveler]

I would suggest refinancing the $94,000, and not taking any cash out. I am a proponent of paying off a mortgage---if she can afford the payments (and wants to pay off the mortgage in 5 years), she could get a 3.5% rate from PenFed Credit Union (she can become a member for $25) (Link: www.penfed.org/productsAndRates/mortgages/mortgageCenter.asp) Obviously, if she prefers a longer term, this would not be the approach for her.

[phil5185]

in her 401K; at a minimum she has $120,000 and probably no more than $300,000. Additionally, mom has another $350 - $400k she will receive in the next few years when her brother sells a house left to the two of them by their mother (I don't know what the tax implications are, so the number I've listed is mom's half, without any tax deductions).

The tax on the inherited house depends on when they inherited it. In fact, if they took ownership in 2006 (when houses were at the peak) they may show a taxable loss when they sell it - ie, they may get a tax refund. At any rate, she will likely get most of the $350,000. That, and the $120,000 401k, leaves her a pretty nice retirement. So she doesn't need to take risks to try to add to it.

I would refi to a <5% 30-yr fixed rate loan, maybe $100k or $125k, to take advantage of the 40 yr low rates. That gives her options - she can slow pay it for 30 yrs (my choice), fast pay for 15 yrs, invest and pay off the house later in a lump sum, etc.

Archie - the reverse mortgages have some ugly terms/conditions, I would rather have a normal mortgage with low payments.

[Deleted]

I like the idea of retiring with a fully-paid mortgage. How appropriate is the house for Mom in retirement? Is it bigger than she'll need (with the attendant higher utilities and property taxes)? How hard/expensive is it to maintain? How many levels of steps? Not implying that Mom is old and creaky (I'm a little older than she is and very active), but they're long-term considerations if she wants to stay in the house as long as possible.

Even if she decides to pay this one off and then retire, she could then sell it at retirement and buy something smaller with cash (and maybe a little left over). Caveat: I suspect a whole lot of us in the same age group may have the same idea at the same time.

[stantonjane]

"My mom is of the opinion that one should pay off their house as quickly as possible and then live in it until dead'

I like the way your mom thinks.

Again, I know I'm not financially savvy, but it seems a simple truth that the sooner you pay off your mortgage and no longer have that expense, the sooner you have that money freed up to do something else with, be it bump up your savings and investments, or afford to earn less and/or retire.

I know there's common financial wisdom out there that says she's losing so much money by having it paying too much interest, and I know people swear that they save money by refi-ing every time they can drop a 1/2 pt. of interest. I guess I'm just suspicious as to how much you're saving, and at what cost. Surely the bank's not filling out that paperwork for free, and I suspect there's fees at the end of the loan I'd rather not worry about, besides an extended loan life.

Call me stubborn, if I can't understand what's going on, I'd just as soon stay with the original plan, mortgage.

[Deleted]

Stanton Jane,

You bring up a good point that none of us touched on which is about fees. Our general advice here is that you should be able to recover the costs of refying within 2 years. Therefore if someone is planning on paying off the mortgage or selling the house within 3 years it probably makes no sense to refi just to save money on interest expense. I refied a house about 18 months ago. I recovered the costs within 8 months. Although there's a good possibility that we will be selling it within the next 5 years, the refi has already paid for itself. Oh and I was able to use the appraisal to challenge my property taxes. That alone was worth the costs of the refi!

[Deleted]

One aspect of the "savings" calculation that's often overlooked is that you're stretching out the term of your loan and that alone will decrease the monthly payment. That's not a savings. Example: our mortgage is 15 years and will be paid off in 2018. If we refinance to another 15-year mortgage, the payment would likely decrease- but the mortgage payments will now go till 2026. Whenever I look at a refi calculation and take that factor out of the picture by calculating what I'd have to pay every month to get it paid off in 2018, the savings aren't worth it.

[thyme4change]

If the OP's Mom goes from her current mortgage to a 15 year mortgage she will move her end-date earlier by 3 years, her interest rate will go down nearly 3 points, and her payment would go down by more than $150 per month.

[thatgirl]

Thank you for all the replies. I like the flexibility of the 30 year mortgage; she can pay extra on it now, to her heart's content, and reduce her payments in the future if need be.

The house my mom currently lives in should be fine for an elderly person in the future. It's 1 story and probably about 1,600 SF 3 BR, 1.5 Bath. Included in the square footage is a rather large den w/ seperate heating/cooling; if mom just stays out of that room, she wouldn't have to pay to heat or cool it (it's in the back of the house).

[Wisconsin Beth]

Jan 11, 2011 7:54:27 GMT -5 @athena53 said:

One aspect of the "savings" calculation that's often overlooked is that you're stretching out the term of your loan and that alone will decrease the monthly payment. That's not a savings. Example: our mortgage is 15 years and will be paid off in 2018. If we refinance to another 15-year mortgage, the payment would likely decrease- but the mortgage payments will now go till 2026. Whenever I look at a refi calculation and take that factor out of the picture by calculating what I'd have to pay every month to get it paid off in 2018, the savings aren't worth it.

Athena, that's my DH's point, when the subject comes up. We're scheduled to pay off the house in about 9 years and he'd like to stick to that. I think he's calculated that we'd need to get a rate under 3.5% in order to do that.

[hsclassic]

Refi, but to a 30year to give the flexilibity should something happen to her income level. I'd be paying extra principal every month as if it were a 15 year loan so that it is paid off (or mostly paid off) prior to retirement (assuming she doesn't use the inheritance to pay off the balance).

Paying off our mortgage 6 years ago was so gratifying, and it was long before retirement. Early retirement is now a possibility since we have saved all of that mortgage interest these past few years.

[Plain Old Petunia]

Well, it is your mom's house, your mom's mortgage, your mom's inheritance, and your mom's wish to retire with no mortgage. She should not refinance. She should take her inheritance, pay off her mortgage, and invest the rest. Going forward, she should max her retirement contributions.

[TrixAre4Kids]

Jan 11, 2011 7:54:27 GMT -5 @athena53 said:

by calculating what I'd have to pay every month to get it paid off in 2018, the savings aren't worth it.

Athena: Have you considered a 7 year arm?

[Deleted]

Jan 12, 2011 13:05:30 GMT -5 TrixAre4Kids said:

Athena: Have you considered a 7 year arm?

No, I haven't thought about it- I'm pretty risk-averse when it comes to mortgage interest and the current rate is under 5%. Might be worth considering, though- we have enough resources that we could always laugh at them and write a check to pay it off if they jacked up the rate.

Just realized- you mean one that won't adjust for the first 7 years. Not a bad idea.

[thatgirl]

given that your mom's retirement savings is almost a 200K spread of you don't know - I'd say mom doesn't want your help???

I'm not sure how the fact that I don't know offhand and haven't pressed my mom for the exact balance of her 401k savings means that she doesn't want my help? I told my mom that I was going to ask the opinion of some money savvy people on this board and see what kind of ideas were offered, and let her know. She gets kind of freaked out about large financial decisions and gets stuck in "inactive" mode - such as paying who knows how much extra interest for the past many years unnecessarily simply because it has been too overwhelming for her to contemplate refinancing. Again, thank you all for the replies.

[❤ mollymouser ❤]

THATGIRL ... there's a thread over in Women in Red on "Recasting Your Mortgage" that might be worth looking at ... and considering that option for your mom.

[Deleted]

Molly,

"Recasting" doesn't lower your interest rate. It only changes the payment if you've made a significant pay down.

If "Mom" is going to be keeping her mortgage for the next 3 years or longer (per my post #11) she should consider refinancing; whether to go for the 30 year fixed or 30 year-fixed for 7 adjustable will depend on cost.

When she finally gets her inheritance she really needs to sit down with a fee-based planner to look at her situation holistically. If she wants to retire early, say in 3-4 years when she finally receives her share of the inherited house proceeds, she's got to figure out how she's going to bridge her income from making $100k a year until she's eligible for SS. I assume the $1,200 a month is at full retirement age (which may be 66 for her). If she takes early SS I still think she has to wait until 62 (double check those ages-DH is 3 years younger so I may be off a little) and that may be at a 20% discount or closer to $1,000/mth. Also how does she plan on paying for health insurance until she qualifies for Medicare (age 65, I think). That alone could run her $500/mth.

When Mom receives her inheritance, based on the scenario presented, it sounds like she'll have a conservative $400k to invest between 401k balance and house proceeds. Since she is so conservative she'll probably want a "safe" investment, say AAA bonds, T-Bills or some kind of annuity. Assuming a 4% annual return is only $16,000/yr or $1,333.33/mth income, a big drop from $100k/yr. or $8,333/mth. At age 58 or 59, she likely to live a long time (90s) unless she's in poor health, so 40 years in retirement is certainly feasible. And while inflation isn't much of an issue now, it will be over a 40 year period of time, so the purchasing power of that $16k will likely be something like a 1/3rd (assuming 100% over a 20 year period; it could be a whole lot less!) what it is today. Imagine living on $5,300 a year; Yikes! Not having a mortgage payment could help but my guess is that she's going to need to start spending the principle at a faster rate than 4% to maintain her lifestyle. And if she's used the principle to pay off the mortgage (say $100k) the earnings on $300k drops to $12K or $1000/mth.

There are many options to consider, hence the recommendation to see the fee-based planner. They have some spiffy modeling tools and probably like to run numbers (and can do it better!) than I can. My gut tells me Mom should probably keep working at the high paying job as long as she can until she can qualify for early SS (say 7 years). During that time she can pre-pay her mortgage on a 10 year amortization rate (say $800/mth) and contribute the max to her retirement; I assume she's eligible for the make up provision so she may be able to contribute something like $20k a year or $1667/mth. It will be a good test to see if she can live on $70k year with her current expenses. In the meantime her 401k and inheritance can grow. The balance on her mortgage will only be about 30k and she will only need to bridge 3 years of health insurance payments before qualifying for Medicare.

If she inherits substantially more than $300k she can probably retire earlier; I'm assuming there's some kind of formula, like 1 year per $50k-$70k in principle.