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Plan Well, Retire Well

Saving and investing your money

Reflecting on Refinancing

Managing day to day finances is one thing but planning for our financial well-being in 30 or 40 or more years is even more complex. When faced with a decision, such as refinancing a home mortgage loan, we need to consider both today's financial situation as well as what will benefit our financial situation when we retire.

Our homes are important to us in many ways – they provide shelter, we enjoy making them "our own" with decorating, gardening, and home improvements, and they are often a source of "forced" saving for retirement. In 2002, (according to the US Census Bureau) home equity represented over 40% of households' net worth. For some people, home equity is an even larger percent of their net worth; for example Black and Hispanic households – on the average – have about 60% of their net worth in their home equity.

Of course, if you plan on your home equity as part of your retirement income, then you do need to be able to access this equity. This typically involves selling your home and finding a less expensive housing option. (Reverse mortgages are another option in some cases.) This can cause a conflict because often people find they want to age in their homes and not sell them. Thus, the term "house rich, cash poor!" Just one more thing to consider when planning for retirement!

Back to the decision process for refinancing a home – when given a choice, do you decide to refinance for a 30 year or shorter duration loan?

One reader sent in this response,

You may not be getting as much of a tax break for your mortgage interest as you think. Take a look at your 2009 tax return. Did you itemize or take the standard deduction? If you took the standard deduction, you're getting no tax advantage from your mortgage interest. If you itemized, calculate what your itemized deductions would be with the new, lower mortgage interest amount if you refinanced. If your itemized deductions would be less than the standard deduction, you won't be losing much of a tax break by refinancing. But don't let the "tax tail" wag the "mortgage dog." It should be just one of the things that impact your decision to refinance or not.

When thinking about this decision, it's also useful to think about what would you do if you took the 30 year loan and had extra cash now? Would you be able to use it to pay down higher interest loans such as credit card debt? If you did this, would you just spend more and build up the debt again?

Would you be able to invest the extra cash and earn higher returns over many years? Well, this is when the crystal ball that I've misplaced would be useful!

However, as cheap as 4.625% (for a 30 year loan) is for borrowing money, you do still have to pay interest on this loan and the interest adds up. This is a known fact rather than a projection of "what might be."

I've talked to other people trying to make this decision, and interesting enough, the desire to have the home mortgage paid off when retired seems very important. Does this make economic sense? I'm not sure it does when you consider the opportunity cost of the dollars; borrowing money at 4.5% for a 20 year loan is very cheap when considering historical interest rates. But, we need to be comfortable with our financial decisions and for many of us paying off our loans goes a long way to making us comfortable.

Ultimately this is a personal decision. Consider your financial goals and values, talk about it with your spouse/partner, and then move forward. Even if it is a hard decision, with home interest rates at these low levels, it is worth the time and energy to consider whether refinancing your home loan – and at what terms – makes sense for you now.

Click on my name below to share your thoughts about this. What factors are important to you when making a decision like this?

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