Ask Money

Refinance or embrace a shorter mortgage

Chris Farrell Sep 22, 2011

Question: We’re a family of 3, and I’m about 40yrs old. We are considering a refinance of our house to get a better rate. We’re fine financially – no risk of default, not underwater, etc. We currently have 20 years left on our existing mortgage, and put $200 into a 529 plan for our daughter who will be in college in 12 yrs. We’re fully funding retirement using my 401K… though we might be able to do a little more there (about 225K in my account now – but that’s the only account).

I’m wondering if it’s better to try and shorten our term to 15 years, so we can be (almost) finished paying when goes to school, OR if we should go with a 30 year term, and put the difference in our monthly payment into her 529. The difference in the 2 options is about $900 a month. Should I consider putting more away for retirement? Lisa, Mansfield, MA

Answer: I like how you’re out to build savings. A 15-year mortgage is a good approach to take so long as you’re happy with your home and neighborhood.

However, there is another option which will give you additional built-in flexibility for managing your money. Refinance your mortgage to get the lower rate but accelerate the payments on your own.

This way you can turn it into a 12 year mortgage, a 15 year mortgage, or a 20 year mortgage. (Since you have only 20 years left on your mortgage I would prefer that its extinguished at that point.) Yet you can always return to the lower regular payment schedule if it turns put you need the extra money or you have a better use for it.

If you decide to refinance and adopt, say, a 20 year repayment policy rather than a 15 year timetable I would put a priority on boosting retirement savings over setting money aside for college. The reason is that time is increasingly precious resource as you age while your daughter will have a lifetime of earnings ahead of her following graduation. The savings you make now for your retirement will really pay off down the line.

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