Q: I enjoyed your article “Does it still pay to pay off mortgage early?” I concur with all you wrote but would like to submit another reasoning should you re-work this article for a future publication date.
Back in 1996 I built and financed my house for $125,000 with a 30-year fixed-rate mortgage at 9.5 percent. Subsequently, the interest rates started falling and I refinanced in 1997 at 8 percent and then again in 1999 at 6 percent. The goal, of course, was to reduce my monthly payment along with the implied reduced interest amount that would have been paid had I not refinanced.
So here we are in 2009, with interest rates at around 4.5 percent and again I am refinancing. The impetus is my impending retirement in 2 to 4 years. My goal is to have the fewest and lowest retirement costs possible.
Since I am 63 years old, statistically, what are the chances of me paying off my new 30 year mortgage before I die? Most insurance companies are fairly certain that I will die by age 83 to 85. Of course, I could die in the next hour or live to be 105 but statistically, I’m certain to be gone in 30 years. That’s 10 years longer than my life expectancy.
So for me, I will no longer add money for an additional principal payment to my regular monthly payment because my mortgage will out-live me and I will have the “additional principal payment” for my retirement uses.
So the short statement is, “If your life expectancy is less, or significantly less than the mortgage term, do not add additional money to your mortgage payment and use/save the money for your living expenses unless someone will still be living in the house after you are gone and you do not have some insurance/money policy that would cover the mortgage.”
Of course this statement is true whether you just refinanced or still have time to go on your mortgage and no matter what your age.
If you think I have made an error in judgment about forgoing “additional principal payment,” then please advise.
A: Wow. I wish I knew for sure when you are going to die. I have had enough loss in my life to know for sure that none of us know when the end of our days is coming. While insurance companies are betting that you’ll be gone in 20 years or so, one of the fastest-growing populations in this country is the 100-years young crowd.
Turning to your question on mortgages, if you had been refinancing the balance only every time you refinanced your mortgage, but still paid the same monthly payment you were paying in 1996, when your interest rate was over 9 percent, I’m guessing that you would have paid off your mortgage balance already or you might be getting pretty close by now.
But like so many folks, it seems as though you started fresh every time you refinanced, which meant another 30-year term. While that lowered your monthly payment, it didn’t do much for slicing years off the loan.
As I’ve often said, to refinance successfully, you should be able to do these three things: Lower the interest rate, lower your monthly payment, and shorten the loan term. If you only get two out of the three, choose the shorter loan term and lower interest rate – you’ll be better off down the road.
You’re now down the road and trying to decide whether you should prepay this loan or keep the extra cash to live on. In this economy, cash is king. It’s not that easy to get a home equity line of credit these days, so I think you should keep the cash.
But I wish you had written me back in 1997. I would have told you to refinance to a 15-year term, and keep prepaying through every subsequent refinance. By now, you’d be mortgage-free for your retirement years and the entire amount you are now paying to your lender could be used for other retirement expenses.
For another article on prepaying your mortgage, take a look at Mortgage Interest Rate Matters Less Than Monthly Mortgage Payment Savings