“Are you making mortgage payments your entire life?”
Jack and Rebecca, both in their late 50’s, have been making mortgage payments for nearly 32 years. Why is it that they still have a mortgage with a remaining term of 26 years? The convenience of using their home as a checking account or a source to draw the funds needed to continue their lifestyle became second nature. Each time they refinanced to pull cash out as needed they extended the term to 30 years which offered the lowest mortgage payments and kept them on this perpetual cycle of having a monthly payment with no end in sight.
Refinancing a mortgage to lower your rate makes perfect sense as long as you don’t extend the terms of repayment. Either continue with the remaining term or shorten the term during the refinance process. In fact, if you shorten the term to 20 years or 15 years, you will be incentivized with a lower rate of interest; giving you a win/win. If you have a term of 24.5 years left on your mortgage and refinance to a lower interest rate, consider doing a 24 or 20 year term loan. The savings over the life of the loan could amount to hundreds of thousands of dollars.
Jack and Rebecca plan on retiring in about 10 years. At which time, they will both be on a fixed income from social security and monthly distributions from an IRA. Their expected monthly income at the age of 67 will be $5,860. Their property tax, insurance, and utilities will add up to approximately $1,300 per month; leaving them with $4,560 in remaining monthly income. If they still have a mortgage payment due each month of $2,834, they will struggle to live on $1,726 per month.
If they never extended their loan term (even if they refinanced and pulled cash out or lowered their interest rate), they would have paid off their mortgage 2 years ago. Let’s assume they invested what would have been mortgage payment with a return of 5%. They would have saved an additional $562,785 in their IRA increasing their monthly retirement distributions by $2,195. Their total income at retirement would be $8,055. After deducting their property tax, insurance and utilities, they would have a remaining income of $6,755 and no mortgage payment.
Jack and Rebecca have since imparted this knowledge to their children so they understand the value of paying off the mortgage and preparing for retirement. Remember that refinancing makes perfect sense if you are reducing your interest rate or in need of funds for any reason, just don’t extend the term of your loan because you are enticed by the lower payments.