Mortgage Rates Are Low. My Chances Of Retiring Are High?

Question

Hi Friends!

I have a question for you all regarding the current Low Mortgage interest Rates.  First of all I was able to take advantage 5 years ago and took a 15 year 2.75% interest rate on our Mortgage, our payment went up approx. $500 (due to a promotion I received) and in addition we have regularly paid anywhere from $30-$150 extra principle a month when we can- because I am SO desperate to pay our mortgage off before we are 60! With that said we have 9 years 10months left to pay our mortgage off in full but I am considering refinancing to another 15 year mortgage at 2.625 % (not much difference) but it would free up $736 monthly.  The extra money would be used to pay off a HELOC we recently got and would allow for some extra room but it's not necessary (we have no other bills, no car payments, credit cards etc.)  I received an estimate for the closing cost and we would be adding 8K to our current loan plus the 5 years, and this is just killing me the thought of my principle balance going up after paying extra over the last 5 years, but the thought of extra cash per month would be nice. Were kind of thinking of retirement in the next 5 years (would like to retire early 56/57 years old).   Struggling what to do, do we refinance or leave as is and if we decide to retire early maybe get a part time job for a few years until our mortgage is paid?  Our mortgage is currently $3050, it would drop to $2390.  In addition I am set to make an additional 10K per year at my current job over the next 2 years.  Should we just stay put or go for it???

Thank you all in advance

Posting this for a friend

Todd Rasmussen · Answer

@Johnny L.

Congratulations on nearing retirement. What does your income projection look like post retirement? If you have enough tucked away to live 40-50 years on your anticipated budget considering inflation then I don't think there's anything wrong paying down your mortgage early for peace of mind.

Assuming that you are going to remain in the home you are talking about, paying down principal has terrible opportunity costs if you assume even a modest return on the savings. I recently was talking to a friend who was convinced he wanted to pursue a 15 year mortgage in lieu of a 30 year mortgage. In his specific situation, he would have realized total repayment savings of $76K on 212K in principal balance. Problem is, if he had put the monthly difference in the two loans into his mattress at 0% interest, he would have saved $93K over fifteen years. Which means as long as he gets better than a -1.2% return on that savings from year 15 to year 30, he'll be ahead of realizing savings in repayment.

Back to your situation, do you have the same hesitation carry a smaller mortgage payment on a 30 year loan into retirement? That would allow you to devalue future principal paid (granted at the expense of greater interest expense), but would also give you flexibility to pay back the loan at a lesser amount if needed. You can't make 30 yr amortization payments on a 15 year loan, but you can always pay off a 30 yr loan early. Also, you should look into rate term refi'ing the HELOC and primary into your new loan.

Because of inflation, the money you spend today is the most expensive money you will spend for the rest of your life. Long amortization periods on fixed loan products combined with compound interest on investments is probably your best bet at maintaining an inflation resistant nest egg.

Mark S. · Answer

@Johnny L., depending on your lifestyle, 65% income replacement is generally low.  Statistically, most people generally “need” 70-80%.  I’ve seen it way higher, too.  Make sure you’re also factoring in healthcare costs.  Sounds to me like you may not be ready quite yet, but it’s difficult to say without knowing your entire situation.  Best of luck.

Johnny L. · Answer

Thanks Todd!

Todd Rasmussen · Answer

I'm always happy to muddy the waters! That is exactly what I meant, although investing savings is key. If you just put it in the bank, you won't get ahead enough. Congrats on 65%. That's a great % of after income retirement.

Johnny L. · Answer

Thank you so much! You definitely gave me some food for thought.  Our projected income post retirement will be 65% of our current income per year and no we don’t have enough $$ tucked away to live 40-50 years, which is why I’m thinking we should pay the mortgage off early.  I figure we are in our early 50s now and our income is higher monthly compared to when we retire (with a fixed income) so we’re able to pay the higher payment.  But I do like what you said about the long amortization period on a fixed loan and use the extra cash to save at a higher rate ( I think that’s what you meant) that has me really considering the refinance.  Thank you for your good sound advice, appreciate it!

Johnny L. · Answer

You are absolutely correct, I am looking at the numbers vs. our life style.  Yes we plan to keep the property – this will be our retirement home, no plans right now to move.  Thanks for the numbers, after seeing your numbers I ran a few calculations and if we do the 15 year vs. keeping our current loan, we will pay an extra $19K in interest (approximately).   Thanks for your input I appreciate it!

Brendan F. Nagle · Answer

@Johnny L. What was your plan for this property? Does your current life make sense with this plan? If so keep it, avoid new closing costs.

If not, then Refi and restart your 15 with about the same terms and for 8k getting 700 less on your payments.

This is a life style choice over a what's the math says choice. Total payments below. Considering nothing else.

2390*12*15= 430200

Math at 3050= 357390

Mortgage Rates Are Low. My Chances Of Retiring Are High?

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