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Ask Money

A mortgage conundrum

Chris Farrell Nov 15, 2011

Question: My wife and I can refinance our mortgage. We have about 24 years left on our current mortgage. Our house is not underwater. We are both safely employed. We owe 135K. We qualify for a 20-year mortgage at 4.5 percent or 30-year mortgage for 4.75 percent? Obviously, for the true cost the 20-year mortgage saves about 80K in the long run. However, if we refinance at 30, we have the ability to save more for our safety net savings and future investment? The refi at 30 gives us a better monthly cushion. What’s best? Currently we have one child. We are saving only about 4-5 percent for retirement. We have a little consumer debt, about 2.5K. I look forward to any answers! Michael, Denver, CO

Answer: From your note it strikes me that money is tight. I usually lean in favor of greater financial flexibility and a stronger monthly cushion. After all, you can always turn your 30-year mortgage into a 20-year mortgage — or less — on your own by accelerating payments toward principal if and when your household income improves.

I took a quick look at the numbers. (I used the ones from your question; so no taxes, etc.) The back-of-the-digital-envelope difference in monthly payments between the 30 year and the 15 year is $152, or $1,824 a year.

However, I would refinance into a 24- or 25-year mortgage. You’ll still come out ahead on a monthly cash flow basis compared to the 20 year option. But you’ll stay on schedule building up your home equity, rather than go back to square one.

If you choose a 24/25-year mortgage I’d recommend putting the extra money toward paying down your consumer debt. Once that’s gone I’d boost the amount you’re putting toward retirement savings.

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