23 Replies Latest reply on Dec 29, 2014 10:08 AM by ProfHanover

    Pay down mortgage to refinance?

    Chrysalis

      I am 60, my husband is 62. We purchased a condo as our primary residence 3 years ago (yep, at the high point of the market!). Our 4.875% mortgage payment is $800/mo with 12 years remaining. I am very concerned about our ability to make those payments after we retire in 8 years.

      We can refinance at 3.125%, but because our condo value has decreased so much, we would have to pay off $25,000 of principal and then we could refinance the remaining $60k. If we do refinance, our payment would be about $260/mo--which we could easily afford even after retirement (we have no plans to sell ever). However, we will probably continue to pay the $800/mo even after refinancing. In which case the new mortgage will be paid off in 6 years.

      To pay down the mortgage, we would have to take the $25,000 from our $200,000 retirement account. To get the lower interest rate, lower monthly payments, and the possibility of paying off the mortgage in 6 years rather than 12, I think this is a good idea. However, most financial gurus say NEVER use your retirement assets to pay for a home. I can understand that when you're in your 30's or 40's, but when you're already in your 60's? What do you think?

        • Re: Pay down mortgage to refinance?
          JerryD
          Since you would continue to pay the current $800/month mortgage it seems that this payment is not a burden now. While it is not clear whether taking the funds from your retirement account would incur any penalty, I am clearly in the group that would NEVER touch the sheltered retirement funds. If cash flow in retirement is a concern how about at least considering paying a higher payment out of current income in the next 8 years so that the mortgage is paid off or at least nearly so. I have done something similar to this with a 30 year mortgage and decreased the payment period by years by paying an extra $200/month say.

          It's not clear to me what your remaining mortgage principal owed is but let's say that it is $85,000. Using the PMT function in Excel you can easily see that:

          Principal = $85,000
          Interest Rate = 4.875%
          Number of Payments = 8 Years * 12 Months/ Year = 96

          The required payment to clear this mortgage in 8 years is $1,071/month. For $271 more per month your mortgage worries at retirement go away and you DO NOT touch your retirement savings.

          Other scenarios are possible to accomplish the same thing. If you have any savings available (maybe tax over payments, say) you can pre-pay the mortgage principal and reduce the increase in the payment for the next 8 years and have it paid when you retire. Just do the numbers! GOOD LUCK!!!!!!
            • Re: Pay down mortgage to refinance?
              Chrysalis

              Hi, JerryD-

              Thanks for your thoughtful response. I like the way you look at things. And you are correct, some months we could pay extra, but some months we can't. As a freelance web developer, my income goes up and down, so it's feast or famine around here. However, we could put more effort into pre-payments, as you suggest.

              The other problem, however, is just that $800/mo hanging over our heads. As long as both my husband and I are healthy and employed, we'll be OK. But my big fear is that one of us will get sick or be laid off. What then?! That's why refinancing to get a minimum payment of less than $300/mo is so attractive to me. We could handle that on one income, or even on Social Security, if it came to that.

              Is there anyone out there who would liquidate retirement funds to pay down a mortgage? Or am I the only one who thinks this might be a good idea?

                • Re: Pay down mortgage to refinance?
                  JerryD
                  Crysalis said...

                       
                            

                  Hi, JerryD-

                  ...

                  The other problem, however, is just that $800/mo hanging over our heads. As long as both my husband and I are healthy and employed, we'll be OK. But my big fear is that one of us will get sick or be laid off. What then?! ...

                  ...

                       
                                  
                            
                  Edited Jan-1   by  Crysalis
                       
                  Seems to me that the key word is "fear". If you were to proceed with as much pre-payment as you can do comfortably, you do NOT have to make this decision until your circumstances change, if ever. At that time you can make the best decision given the then well understood circumstances. Delaying the decision preserves your retirement assets as well.

                  As I always say, DO THE NUMBERS.

                  Good luck!


                • Re: Pay down mortgage to refinance?
                  BoBraxton

                  Thanks for pointing to specific ways to do the numbers.

                • Re: Pay down mortgage to refinance?
                  libraryGal
                  One option that I've used in the past is to borrow money from your retirement account.  Not all retirement plans allow it, but if yours does, that would be a way to get the $25,000 without incurring any penalities, then use the difference between your new payment and old payment (plus any extra $$ you might have in a feast month) to pay off your loan asap.  Worst case is you'd pay off the loan in 3-4 years (depending on the interest rate, etc.)...Then you could focus on paying down your mortgage...Or if after refinancing you find that you are able to qualify for a home equity line at a lesser rate than your loan from your retirement account, get a HEL to pay off the load, because your interest payments on a HEL are deductible.
                    • Re: Pay down mortgage to refinance?
                      Chrysalis
                      Thanks, LibraryGal! Those are excellent suggestions! I know I can borrow against my TIAA-CREF account and that might be a good option for us. And paying that loan off with a tax-deductible HEL sounds really clever. I'm going to meet with a financial planner today and will definitely add your suggestion to my list of questions.
                        • Re: Pay down mortgage to refinance?
                          Chrysalis

                          OK. I've researched the heck out of this issue, and I met with a financial planner yesterday to discuss it. The upshot is that for us, in our personal and financial situation, my plan is a good idea.

                          The financial advisor said that, while she usually does not recommend using retirement funds to pay down a mortgage, she can see that if either my husband or I gets laid off or can't work, money will be very tight. An $800/mo mortgage will be a hardship. She is old enough to understand the value of peace of mind, too. So she could see the wisdom of refinancing a smaller principle at a lower rate to arrive at a monthly payment we're more comfortable with. But she said it would be to our benefit if, and only if, we have the discipliine to continue paying the $800/mo (i.e. with a $500/mo prepay) until the loan is paid off. Most people do not have that much discipline. We do.

                          She also warned that we will be putting a big chunk of change into a property that may continue to decrease in value, so when we go to sell, we would be badly burned. However, since we have no intention of selling, that is not a concern for us. As a matter of fact, once the condo is paid off, I'm thinking of getting our money out of it via a reverse mortgage. But that's a ways down the road.

                          LibraryGal, I did ask the financial planner about your idea of borrowing against my TIAA and then getting a home equity loan. The planner said she had never heard of such a thing; it sounded like a dangerous shell game to her. And besides, lenders are being very picky about home equity loans these days, so it would probably not even be an option. However, you did get me to think about the tax consequences of a liquidation. So now I'm thinking about getting a TIAA loan and liquidating the $25,000 slowly over 5 years to pay off the loan, thereby avoiding a big tax hit in one fiscal year. I'm going to crunch the numbers on that, but it may be a good option for us. Thanks for the suggestion!

                          Lastly, after looking at our all our data, our investment returns, my calculations about refinancing, etc, the financial planner said that she didn't think we really need to hire a financial planner. I seem to have a good handle on things and understand the pros and cons of various decisions and there would not be a lot more she could do for us. I took that as a compliment! 

                          Thank you JerryD and LibraryGal for your valuable thoughts and suggestions.

                            • Re: Pay down mortgage to refinance?
                              libraryGal

                              Great idea on the loan and 5 yr. payment plan  to reduce the tax implications - although you might want to keep an eye on Long Term Capital Gains rates, and federal tax rates (depending on how your withdraws would be classified) - There's a very good chance that they will increase.  Per the extension signed by Obama in Dec. 2010, the tax rate on long term Capital Gains will be 15% in 2011 and 2012.  Will go to 20% in 2013.  If your ordinary Federal Income tax rate is under 15%, you won't pay any CG tax in 2011 and 2012.

                              So, check with your tax advisor to see how the distributions will be taxed, then look at where you fall in the tax tables to determine if the 5 year  plan makes sense.

                               

                              Best of luck to you!

                                • Re: Pay down mortgage to refinance?
                                  JerryD
                                  Not real sure I understand the tax implications if any on taking out a loan against your TIAA. Why would there be any? It's not a distribution as I would understand it.

                                  On the matter of a reverse mortgage, there are some very high expenses as I understand them. I get the impression that it should be saved for later years when money is very tight.

                                  Good luck and keep doing the numbers!


                                    • Re: Pay down mortgage to refinance?
                                      Chrysalis

                                      Hi, JerryD-

                                      No, there are no taxes on money you borrow from a 401k. Taxes (and sometimes penalties) apply only to money you actually liquidate. That's why liquidating $25,000 all at once could bump us into a higher tax bracket for that one year and cost us dearly, while liquidating only $5,000/yr, while still taxable, is unlikely to raise our tax bracket.

                                      As for reverse mortgages-- I did a lot of research on that for my mother. I decided that, despite what the RM salesmen say, once you get a RM you should consider that you "sold" your house to the lender. Perhaps not technically, but as you say, the costs are so high and they compound so fast that any remaining equity is eaten up in 2 or 3 years. So if you have heirs, they won't be happy. However, when you get an RM you get 70% of the value of your home as cash (that number changes a lot) and you can live in your hourse forever without making any repayments. Therefore, it's actually smarter to get an RM as soon as you can (age 65) so you can invest the proceeds and have them grow until you need them.

                                      Reverse mortgages are tricky and every situation is unique. But, because we don't have heirs and never intend to sell our condo,  it is one option that I am considering so that the money tied up in our home can be liquid and can be growing for us.

                                    • Re: Pay down mortgage to refinance?
                                      Chrysalis

                                      Gee, LibraryGal, you really know your stuff, don't you?! Here I was congratulating myself on even CONSIDERING the tax angles, and you're way ahead of me on CG and proposed changes in the law! How will I ever get up to speed on all this?!

                                      But thanks for the warning. I understand what you're talking about (thank Heavens) and will look into the tax ramifications in future years. (Ugh!)

                                        • Re: Pay down mortgage to refinance?
                                          JerryD
                                          Thank you for the explanation. I wasn't quite following the proposal. I understand now.

                                          Hey, not to be a pest, but raiding the retirement assets kind of offends me, you say that you have a condo. Rather than a RM why not consider this. Sell your condo, take the cash, invest it and rent an equivalent condo probably in the same building for less than a monthly mortgage payment? Early in our married lives we owned a condo that did not appreciate much. I suspected that lots of previous owners just rented them instead of selling. I even thought of doing it but I could never be a landlord. Also, the money you leave in TIAA earns tax free until you start taking it.

                                          Just a thought.
                                            • Re: Pay down mortgage to refinance?
                                              Chrysalis

                                              I'm sure that someday selling the condo and renting instead would be a good solution for some people. I'm glad you suggested that. However, for us our main goal is to NEVER be in a position of being homeless in our old age. NEVER. Therefore, no renting! No landlord who can legally raise the rent ad infinitum until we can no longer afford it on a fixed income. Or a landlord who decides to sell the unit so we have to move out. With little money and no children or other close relatives, what would we do then?

                                              I can see, Jerry, that you're really having a hard time getting your head around this situation. I hope and expect that is because the possibility of someday being old, sick, broke, and homeless is not a concern of yours. And "more power to you", I say. But it's a real possibility for a lot of middle-income people, including us. Especially given our insane healthcare system-- one major health crisis or extended nursing facility stay and we could be financially devastated AND lose our house. GET IT?!! I would much rather use our retirement savings now to secure our home than give it to the healthcare system later AND eventually lose our home, too.

                                              And for all of you who are fighting "Obamacare" and other health care reform legislation, I hope you all have paid-off mortgages and a million dollars in your 401k so you can afford lots and lots of supplementary health insurance, steep co-pays, "donut hole" prescription costs, and private nursing care. I suppose you do. Why else would you fight reform? But for the rest of us who are not so well-off, if we're broke and sick, Medicare and Social Security will step in once our assets are down to zero. But if we're homeless, tough! We're on our own. So I am going to secure my residence while I can.

                                              Get it now?

                                                • Re: Pay down mortgage to refinance?
                                                  JerryD
                                                  Sorry. Meant no offense.

                                                  But be careful of assumptions. Understand your fears and share all of them. Only offered my opinions based on my experiences and much time spent planning and managing our personal finance.

                                                  Go for it.
                                                    • Re: Pay down mortgage to refinance?
                                                      Chrysalis

                                                      The end of the story...

                                                      Thanks to all who offered their opinions and suggestions about this question. You all gave me a lot to think about and I much appreciate it.

                                                      Just to let you know what finally happened...

                                                      We decided to liquidate up to $25,000 of our retirement savings to pay down the mortgage and refinance. We applied for the refi and were approved, everything was on track, and then they did the appraisal. The codo we paid $125,000 for is now appraised at $67,000! Egads! So in order to refinance, we would have to liquidate more than $40,000 of our retirement savings. No way we would do that. So that was the end of that little escapade.

                                                      The silver lining (such as it is) is that we are now going to use this new appraisal to get our property taxes reduced by half. Whatever money we save from that we will put against the mortgage principle. And, of course, I'll keep looking for other schemes ;-)

                                      • Re: Pay down mortgage to refinance?
                                        Chrysalis
                                        A little silver lining

                                        Well,  here we are almost a year later. After our disappointment with not being able to refinance because our condo depreciated so much, I have a little good news to report. 

                                        We did apply for a reassessment from our county tax authority. As a matter of fact, since we live in a condo community, a bunch of us went in all together and applied for reassessments. We must have built a convincing case because the county lowered our appraisals by 50%! (Atlanta has been hard hit in this housing decline.) So now our tax bills have been reduced by 50%. The low property value hurts, but at least the taxes are now based on current values. 

                                        So I am taking the extra $150/month we're saving in taxes and applying it against the principle. That will shorten our mortgage repayment by 2.5 years and save us $5000 in mortgage interest. Not as good as refinancing would have been, but better than nothing. As they say, "It's an ill wind that blows no good." 
                                        • Re: Pay down mortgage to refinance?
                                          Chrysalis

                                          Postscript:

                                           

                                          In October of 2012 I heard from a friend that HARP 2.0 (Home Affordable Refinance Program) was a good way to go for refinancing an underwater property. I looked into it and sure enough, it worked. We were able to refinance the entire mortgage balance and lower our interest rate from 4.875% to 3.15% (15 year fixed). That saved us almost $500/mo in mortgage payments! Oh Happy Day!!

                                          • Re: Pay down mortgage to refinance?
                                            mollyb

                                            Keep paying as much as you can until you retire. Just prior to retiring, ask if you can reset you payments over the number of years that you have left on the mortgage so that you will be paying a much smaller amount per month because you have paid so much up front.  I will be doing this with a current refi.  My lender said that they will adjust the payments for me at a later date.

                                            • Re: Pay down mortgage to refinance?
                                              ProfHanover

                                              My best advice is to contact NACA. They can help you to actually lower the balance you owe since you are so upside down. They host big sessions with the banks right there and help you to get your mortgage under control. You've probably seen them on the news when they go to large venues such as sports arenas or convention centers. It's worth every minute you spend there. I would not have been able to save my house without them. www.naca.com  Good luck!