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Refinance or pay off mortgage

Chris Farrell Sep 21, 2011

Question: My wife and I own a home that is currently worth at least 350 to 375 thousand. We have refinanced several times over the 40 years we have “owned” it and now have a balance of 58,000 with a variable rate loan, currently at 6.7% and has been going up over the past year or so. My wife (age 63) got laid off 2 yrs ago and has started SS retirement and I (age 64) started SS retirement about 1 year ago and still work part time. Income is limited for us. We are thinking about paying off the 58,000 balance vs. taking the new loan which lowers our monthly payment by about $200. We have about 50,000 left in cash reserves and also have about 60 thousand in IRA’s and a 401k. We are trying to decide whether to pay off the loan or refinance. With the lower interest rate, I am not sure there is still an advantage in terms of itemizing on our taxes and though it is good to have money in reserve, by paying the loan off it is about the same as getting 3.8% return on the 58,000 which seems about as good as most safe investments get at this point. Any opinions? Thanks Steven, Salt Lake City, UT

Answer: It’s a good idea for homeowners to have paid off the mortgage in their retirement. That’s the baseline scenario. I’m also worried that you have a variable rate loan that has been going up even as all other rates come down. Getting rid of a 6.7% variable rate mortgage will be good for your bottom line.

However, before doing anything the real question is to ask yourselves, “Is this the home for us in our elder years?”

For example, would it make sense for you to move into a smaller house, a condo, a townhome? Smaller homes cost less to maintain than large homes. Property taxes are lower. So are annual insurance costs. And these savings compound over time. Those savings can really make a difference on your cost of living.

What’s more, it gets harder to do chores and maintenance on a home as we get older. It’s easier to take care of a small yard and a single-single story home. The maintenance is contracted out with a condo and townhome. In this scenario, the equity from your current home will pay for the new place so you’ll be mortgage free and enjoy a more suitable living space.

As important as the home is your community. Are neighborhood and community services easily available to you from your current home? Are there institutions and organizations around you that will make help you stay active and engaged?

These are the questions and household and community audit I would take first. It’s also why I am less enamored with the idea of refinancing again. I think after looking at this decision as part of a much larger lifestyle choice you’ll then know what’s the best financial choice for you, sell, pay off mortgage or refinance. Good luck.

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