the only drawback to it is that more of your money each month will go toward interest. but that is a tax deduction, so it may be ok.

also if you sell the house in just a few years, you will have a higher priniciple balance, therefore less equity, if you change to a 30 year note.

personally, i am not sure what i would do in your situation.

since you both are only 15 years from age 65, consider this. at 65 you are eligible for a reverse mortgage. you get paid by the bank every month for your house as long as you live in it. this can be used to help fund retirement, so if you think you are going to go this route you could take some of the money you now put into a retirement fund and put it into other funds for more ready access in the event of an emergency.

You don't say whether you and/or DH will be eligible for a pension. And if so, whether the pension will have a cost of living adjustment (cola).

Also, do you plan to dtay in the same house when you retire?

If you both will qualify for a good pension, I'd keep the current situation and get the house paid off especially if you plan to stay there. If/when either of you get raises, perhaps the raise could go into additional savings/investment....

What interest rate are you paying on the HELOC?

What interest rate would be asked on a refinanced mortgage?

You give no indication of current value of home or of amount of mortgage, but the mortgage made 4 years ago being 40% of current (appreciated) value of home, plus a HELOC of $30,000. current value, which probably means that it was for a somewhat larger amount earlier, indicates to me that it looks as though you made a rather small down payment on the house in the first place. When you were in your late 40s.

In 30 years you'll be ... 85 or so?

Do you want to put yourself into a position where you'll be spending a major portion of your retirement income on a mortgage - for 20 years, supposing that you retire at 65?

Would your investments with the ongoing income be in tax-deferred retirement accounts, or would you be taxable on the ongoing income?

If not, can you earn more on future investments, after the tax is paid, than you're paying on your mortgage, after allowing for the tax deduction?

If you buy quality stocks with the investment amount, quite likely the value will increase over the years and it's likely that you'll be able to defer reporting to the income tax people regarding that increase until you sell the stocks or die.

Buying equity-based mutual funds may well produce annual income that, while it's usually reinvested, none the less is income in that year, and taxable then. You should keep track of the annual amounts invested, for they add to the original amount invested, to calculate your total cost, to deduct from your selling amount to calculate your capital gain after sale.

Do you get a tax refund?

If so (and I prefer to see folks get none - why make interest-free loans to the government?) what do you do with that?

If your mortgage contract allows you to make additional payments on principal, that helps to reduce the number of years that your mortgage will run. This is especially true in the early years, for you owe a large amount then, which means that most of the amount of your regular payments go to pay current interest on that large loan - in later years, when the amount owing has become much smaller, a large portion of your regular payment is used to retire the principal.

If your HELOC was undergirded by stock certificates, rather than or in addition to the equity in your home, would there be an appreciable difference in the rate of interest charged?

By the way - if it comes to reverse mortgages, in the Canadian situation, I'd prefer to negotiate one with a regular lender, rather than one of the agencies that offer them as their major business, for there are some unattractive concerns with some of them, it seems to me.

Good wishes as you think these issues through.

ole joyful

No pensions here -- just whatever we've saved in retirement accounts and elsewhere.

We don't know yet whether we'll stay in this house indefinitely, but I'd say there's a good chance we won't.

We also own an investment property that we purchased as part of a 1041 exchange. There's no mortgage on it, so it generates a bit of income. We may sell it eventually, but not any time soon.

We do get raises every year, but they seem to barely keep up with the cost of living. We have been trying to build up additional savings for several years now, and it's just not working with our current setup. And we really live very frugally. We drive old cars that are paid for, we never take expensive vacations, and we don't buy a lot of clothes or things like that. I would like to not feel so pinched if it's not necessary.

joyful, we were typing at the same time. Thanks for chiming in. I'll answer some of your questions below.
What interest rate are you paying on the HELOC?
8.25%

What interest rate would be asked on a refinanced mortgage?
Probably around 6% or a little less.

You give no indication of current value of home or of amount of mortgage, but the mortgage made 4 years ago being 40% of current (appreciated) value of home, plus a HELOC of $30,000. current value, which probably means that it was for a somewhat larger amount earlier, indicates to me that it looks as though you made a rather small down payment on the house in the first place. When you were in your late 40s.
I didn't want to put too many personal details on the 'net. But yes, we only put 10% down on the house and took out an 80/10/10 loan for 30 years. We quickly paid off the second mortgage (at the time, we weren't putting as much into retirement accounts). When rates went down, we refinanced.

In 30 years you'll be ... 85 or so?
Most of the people in my family don't live past the age of 80. I may be an exception! DH may still be around.

Do you want to put yourself into a position where you'll be spending a major portion of your retirement income on a mortgage - for 20 years, supposing that you retire at 65?
I don't think we'll be in the house that long. However, if we are, and if we do want to pay off the mortgage, we will probably have enough cash available to do that at that time.

Would your investments with the ongoing income be in tax-deferred retirement accounts, or would you be taxable on the ongoing income?
Income on these investments would be taxable.

If not, can you earn more on future investments, after the tax is paid, than you're paying on your mortgage, after allowing for the tax deduction?
I'd say it will probably come out about the same, or we may be somewhat ahead on the taxable investments.

Do you get a tax refund?
If so (and I prefer to see folks get none - why make interest-free loans to the government?) what do you do with that?
We try to avoid getting a large refund for that very reason.

If your HELOC was undergirded by stock certificates, rather than or in addition to the equity in your home, would there be an appreciable difference in the rate of interest charged?
I don't understand this question.

Thanks again!

In terms of net worth at the end of 11 years, you will be far better off not refinancing.

We're putting the maximum into retirement accounts, and we have no debts and enough to pay all our other expenses, but we're rather close to the edge in the sense that we aren't able to save any additional.

Depending upon what you have already saved, maybe you could relax some on putting in the max amount.

Sounds like a good question for a financial planner...might you have one? Maybe a friend could recommend one? By actually crunching the numbers they could get an idea of what you might want/need for your retirement lifestyle.

I would like to not feel so pinched if it's not necessary.
Maybe just relax the savings some (if financial planner sees you are in good shape to do so). That doesn't mean you would have to spend the extra money...it would just be there readily available for wanted/needed things.

I can remember being so strapped for 'extra' money, that I jokingly said the I didn't have enough for a pack of gum after everything necessary was paid and/or bought (gas, groceries). I can remember it was not fun...but am now glad for it. I was buying stock in the company I worked for...at a reduced rate...and as much as they allowed. Those 'lean' times afforded me the luxury of retiring at the ripe old age of 48.
Some former coworkers still refer to me as one of the major stockholders in the company...yeah right...Contel...then GTE...and now Verizon.

Sue...who has been enjoying retirement for 7 years already

landmarker, could you expand on your comment, if possible?

Sue, I don't want to reduce my contribution to the 401K because I didn't start saving anything for retirement until about 6 years ago, because I didn't have a real job until I was about 35 (was living the bohemian, broke life up till then). The first couple of jobs were so low paying that I put only the minimum into any retirement plans. So I really am catching up now.

DH is somewhat better off in that he's been working longer, but he also wants to keep putting in the max.

We could probably scrimp a bit more than we do (e.g., not buy the pack of gum), but I don't think it would add up to anything significant, and like I said, we're already pretty frugal. For example, I take my lunch to work and drink the free office coffee, so weeks can go by before I crack the folding money ($5 or $10) I carry around in case of emergency.

Anyway, we're really leaning toward doing the refinance, but we need to run some more numbers on it. Thanks for the comments so far.

If you take the amount you are paying each month currently you will own your home free and clear at the end of 11 years. If you refinance you will reduce your payment. Pretend you will invest the difference between your current payment and the new payment. I believe after adding your closing costs, the amount of mortgage that you still owe at the end of 11 years will be higher than the amount you save with lower payment. Find what is called an amortization table which I am sure is avaialbe all over the internet to check this out for yourself.

Harriet,

I totally agree with landmarker. Pay off your mortgage, don't refinance.
If you are maxed out with your 401k with both your accounts, that is about $31,000 per year. That is quite a bit of investment by anyone's standards.

Remember that when you are investing money, there is inherent risk associated with what you chose to do with that money. I know many people that lost 1/2 of their portfolio value with high tech stock crash a few years back, including some of our accounts.

Another big factor that you must consider is that your expenses and income will be after you retire. Even if you invest more, if your retirement income will be significantly less than your current income, it is probably better to not have any mortgage payments left. Typically, the cost of ownership of a house, ie tax, insurance and maintenance is 2 to 5 percent of the value of the house per year, even if the house if paid off in full. (or set that much aside for major repairs..) Have a financial planner do the numbers for you regarding expected "monthly income" after retirement when you retire based on current investment projection versus increased investment with outstanding mortgage.

When I did the number on a $300000 loan 6% interest 15 year versu 30 year payback was a difference of about $800 per month. ($2531.57 versus $1798.65) Let's just say that is the amount we are talking about, it is about 10k investment per year which is only a 1/3 of your total 401k investment. Because of the tax deferred status of your 401k investment, the real difference is probably even less than that. If your total loan amount is less than that, the difference will be even less.

On a 30 year loan, at the end of 12 years, you will have 230,000 principal remaining out of $300,000.

$800 monthly invested on 6% return will give you $168,000 at the end of 12 years. at 8% return, you will have $192,000. At 10% return, you will have $221,000. This is assuming that you need not pay taxes during that time, nor have investment related expenses.

I think the expectationt that the earnings will be enough to pay off the residual loan amount in full is a bit optimistic in my opinion.

Just some numbers to throw around.

momtokai, thanks for doing that. Would the recommendation be different if (a) the loan amount were lower (which it would be) and (b) the monthly investment were higher (which it would also be)?

The difference in the monthly payment between our current two loans and the possible refinanced loan is around $1,000. The other variables: the LTV would be pretty low (i.e., starting out, we would owe less than 50% of what the house is worth now; who knows what it will be worth in 10 years?).

I found some interesting calculators in the link below.

Here is a link that might be useful: Financial calculators

This is what you asked originally.

Is there anything wrong with this plan? Any pitfalls that I haven't thought of?

Yes, there are risks associated with investment. You can lose it all or make 10 fold depending on the risk you take and the luck involved. Depending how much money you can afford to lose, you can put it in very risky places. This is why the more you have, the more you can make. When you have alot, you can afford to lose alot with the possible big payback.

This is what the "pitfall" in your assumptions are. You assume that you will have enough to pay back the residual on the mortgage, which I tried to show you that you may not. It really does not matter what the mortgage amount is. This is an assumption that may not be satisfied at the end of your investment cycle, and you have to accept the risk, ie having a big mortgage left at the beginning of your retirement. If you are okay with that, meaning, large mortgage AND unsatisfactory return on your investment, then you take the risk of putting in an investment vehicle with a possible bigger return. However, if you put the money in areas where the return is less risky, the percent return will not exceed the mortgage interest.

Some people are by nature of who they are capable of big financial risks and others aren't. Often, it has very little to do with how much money they have. It is their personality. So you can't ask someone else to do your "risk analysis". There is a big "gut feeling" factor in this.

What I have tried to show is that unless you make about 8 to 10% return in your investment over the 12 year period, you will not have enough to pay off your mortgage. 10% return on taxed investment is a relatively high risk portfolio by anyone's standards.

Hope this helps.

Momtokai, nice clear explanation.

Thank you! That gives us more to think about.

I hope I'm not being annoying here, but I've been mulling this over some more. Here are our reasons for considering a refinance:

1. Improve our current cash flow and allow us to have more ready cash available. We currently have no debts and can pay for all of our needs and then some, but there's nothing extra in case of emergency, such as in my second point ...
2. Set up finances so there is less of a burden with the mortgage in case something untoward happens (such as if one of us lost our job).
3. Invest and possibly do better with the equity than simply paying off the house.

The cons to the above, as I see it:
1. The overall cost will be higher in the end.
2. Will still have a mortgage as we enter retirement age.
3. Could possibly lose money on investments.

I should have had the qualifier in my initial question to the board here that having enough money to pay off the house after 11 years is not a requirement; it would be a perk. Keep in mind that the house is worth far more than the new mortgage balance. The only cash we would take out would be to pay off the HELOC balance. If we end up selling the house before it's paid off, unless something terrible happens with the housing market in our area (and if it does, we will all be in big trouble -- like in a repeat of the Great Depression), we should still take a significant amount of cash away from the table (more than we would owe at that time). If it turns out we do retire from the workforce with a mortgage still in place, the payments will be low enough so we shouldn't be struggling.

Obviously, it would be beneficial for us to consult with a professional financial advisor of some sort who could look at all of our numbers and give us some informed advice. But I thank everyone here for being willing to weigh in.

Hi Harriethomeowner,

We've been thinking about refinancing to a 30-year mortgage and using the difference between what we're paying now for both loans and what we would pay after refinancing to build up our cash reserves and to invest. After 11 years, we'd have a good cushion and would still have paid off a good chunk of the new mortgage. If we stick to the current situation, in 11 years we'll have a paid-off house but no money (except for the retirement accounts, of course). I expect that we may even sell the house by then, though we don't have any concrete plans along those lines yet.

If your profile didn't say "Maryland" I would have SWORN you are one of my current 'fly-over-state' clients! Age-wise, equity-wise, existing-loan-program-wise... maybe you ARE them (and are using Maryland to trick us?)

In any case... you are on the right track of thought. What is critical in this is the class of 'investment' you use as you build your retirement safety side account. There are various alternatives to consider, but in ALL cases you ought to restrict your selections to ONLY investment strategies with principal guarantees (or floor-limits against losses.) Home equity should never be treated as 'toss of the dice' risk equity.

Good luck!
Dave Donhoff
Strategic Equity & Mortgage Planner

Dave, I didn't notice your response until just now. I'm just getting my thoughts organized in preparation for calling some loan places to get rates.

We talked to our accountant last week when we were finalizing our tax return, and she said our plan is not a bad one, but she also cautioned that we would need to be very careful about how we invest the money.

We were thinking of simply opening a mutual fund account with a balance of investments and adding to it monthly (dollar cost averaging) but only after we build up at least 6 months' emergency money. We're also thinking of opening up an internet savings account to earn more interest on our liquid cash.

This is such unfamiliar territory for me. I really don't want to continue with the current situation, but also don't want to make any costly mistakes.

Hi Harriet,

Dave, I didn't notice your response until just now. I'm just getting my thoughts organized in preparation for calling some loan places to get rates.

Horse before cart;

I suggest focusing on the right loan structure and terms before being concerned about rates.
I suggest focusing on the right equity investment choices before being concerned about loan terms.

IOW, get the plan together for how you'll protect & employ your equity before worrying about the terms & costs of accessing the equity.

We talked to our accountant last week when we were finalizing our tax return, and she said our plan is not a bad one, but she also cautioned that we would need to be very careful about how we invest the money.

Absolutely agreed. You need a well thought-out investment and protection plan in place, including the future stages of equity (what will we do after 2 years? 4 years? 10 years? What will we do as the real estate accumulates more unprotected equity? What will we do as employment income increases? Decreases? Finally stops?)

We were thinking of simply opening a mutual fund account with a balance of investments and adding to it monthly (dollar cost averaging) but only after we build up at least 6 months' emergency money.

Mutual fund investing is good for your "risk capital" portion of your family portfolio. How much you allot to your risk-capital depends on several factors including age, years before planned employment retirement, current passive income portfolio, and personal emotional risk tolerances.

In general, most re-balanced home equity ought to be positioned into growth instruments with more security (guarantees against loss of principal) than mutual funds offer.

We're also thinking of opening up an internet savings account to earn more interest on our liquid cash.

Good idea here.

Remember the distinction between investments & savings;
Investments have the possibilities of "home runs" and also "complete losses."
Savings have guarantees against loss of principal, but grow at more conservative rates.

Balance carefully.

Cheers,
Dave Donhoff
Strategic Equity & Mortgage Planner

Thanks, Dave. When I said "rates," I was using that as shorthand for the whole loan deal. I've been running calculators and narrowing down a few lenders to call.

Would you be willing to expand a little on what types of investments (in general) would fall into the category of "growth instruments with more security"?

DH and I are 47 and 49, with no children, so I don't know how conservative we have to be with our investments. Our 401ks are invested fairly aggressively.

Hi Harriet,

Would you be willing to expand a little on what types of investments (in general) would fall into the category of "growth instruments with more security"?

Growth & Security are on opposite sides of a continuum scale, or even a 3-dimensional graph, if you through in time & access values. There are SO MANY choices of structuring, it would be impossible for me to responsibly cover any recommendations here.

There are direct share investments (stocks, bonds, futures, partnerships) that all ahve varying risk & safety profiles. There are professionally managed funds or account management services that monitor the above.

There are pre-packaged investment services provided by fund managers, and bank trust accounts.
There are also pre-packaged investment and insurance strategies (including accounts with no-loss guarantees and matching upside returns to the broad index markets.)

Everything has it's counter-side. The choices with the most possible upside tend to also be naked to the biggest risks. The choices with the most safety guaranteed either offer less in growth... OR offer stronger growth only if you pre-commit to keep your paws off the funds for a long-term commitment (often 5-15 years, in the case of any worthy investment policies in annuities or insurance contracts.)

There are no "one solution fits all" answers... and each family is BEST served with a formula of several pieces that cover several angles. It is the development of a custom "recipe" that is the most optimum.

DH and I are 47 and 49, with no children, so I don't know how conservative we have to be with our investments. Our 401ks are invested fairly aggressively.

A great deal of how you design your own "recipe" for investment/saving against leverage (debt married to appreciating assets) will depend on how you want your future to look, by when, and how you feel about taxation (believe it or not, not everyone completely hates it... LOL!) It will also depend on if you have any desires to direct left-over assets to related family, or unrelated orgainzations or charities.

First & foremost, of course, you want to absolutely ensure that you run out of life BEFORE you run out of money! ;~) Nobody wants to flip that backwards... but many are at exactly that risk.

All the best!
Dave Donhoff
Strategic Equity & Mortgage Planner

So here are the terms we were offered: 30-year mortgage at 6.125%, no points. We have the option to keep the HELOC (there is a small fee to do this). We are thinking that this might be the way to go because (1) it will lower our monthly payment to $730 less than what we're paying now, (2) we won't be paying off the small-ish HELOC balance spread over 30 years, (3) we can pay that portion of debt off sooner and have a pretty small mortgage payment as we get closer to retirement, and (4) we'll have the line of credit open in case we need it.

If we roll the HELOC in, our payment will be about $600 less than what it is now.

Settlement costs in both cases are about $4500.

One question still out there is when you might want to retire. Without pensions, I'm assuming your health costs are your burden fully once you retire. That could become a huge issue in any early retirement scenario.

Also undisclosed is how big the actual mortgage will be over these 30 years. You don't have to say what that number is, but you stand to pay THAT number for a long, long time in exchange for the payment being $600 to $730 less for the next 11 years.
With your current mortgage schedule, you will own the home in 11 years at age 58 & 60. If you refinance, you will owe 80% of what you borrow now after those same 11 years. Not sure that will feel like you have paid "a good chunk" when you still owe that 80%.

My vote is with momtokai, landmarker and chemocurl. Gutting out the status quo may be better in the long run if it is doable. It may be tight, but you are positioning yourselves nicely for the future. If you have your emergency funds and you max out your retirement contributions, you are in good shape.

That you want to feel less squeezed makes me think it might be hard to hold to a plan to dedicate those newly available dollars to savings when there are so many other tempting options. I like the alternative suggestion to pull back on the retirement contributions - not as a habit, but for a need or splurge. (The 4500 in refi fees could also be redeployed for splurge purposes - think of those dollars and their role in this also.)

Celticmoon, the problem is that we *don't* have sufficient emergency funds, and I just don't see how we will be able to build them up if we don't reposition this debt. We are really very frugal. The fact is that if we keep the current loan in place, we will end up 10 years from now with a paid-off house and not very much cash. That doesn't seem a good place to be. The reason we are in this position is because of the higher payment for the 15-year loan plus maxing out retirement accounts, both of which started around the same time. Putting the maximum into tax-deferred retirement accounts seems important right now. I'm turning 50 this year, so I can put even more in.

We are not going to be taking cash out, so the amount owed will stay the same, and it's less than half what the house is worth on the market right now. Our mortgage payment will be quite low -- much less than what one has to pay to rent a small apartment around here.

Basically, we'll be paying the extra interest and fees so we have the peace of mind knowing that we have liquid funds available, even though our net worth on paper may not be as high. Our plan is to put, at a minimum, the entire amount we're saving by refinancing into a high-interest Internet account and continue to do that until we have a real emergency fund again. Then we'll pay off the HELOC balance and start investing in some low-to-moderate risk funds. This seems pretty conservative to me.

The house is just a house. We don't have strong feelings about needing to own it outright, and we don't have a moral aversion to properly managed debt. We *are* averse to knowing we'll have to borrow money if we need to replace a car, do a major home repair, or finance some other big expense.

Harriet,

If you are starved for emergency funds... then all other arguments are moot.

CASH IS KING....

If you do not have enough safety cash, but more than sufficient unleveraged equity, then you are simply playing with fire.

Why risk it. Get yourself rebalanced for safety AT MINIMUM.

If you plan it out such that you also structure some of your equity into stronger and safer growth positions than being idle in your residence... that's something to consider, and there's plenty of room for argument about which flavor is the best for that.

When it comes to protection, I see no arguments.

Good luck!
Dave Donhoff
Strategic Equity & Mortgage Planner

I'm curious, the 6.125% interest/no points on the mortgage sounds like a good rate, but what is this $4,500 in fees? Sounds like instead of the lender calling it points, it sounds better as fees. I realize some of this is unavoidable like title search, legal,taxes, etc.. but who is getting the rest of the money?

I just got the complete good faith estimate, and there are actually only about $2,500 in fees. The rest of the costs are prepaid items - taxes, interest, and insurance - which obviously we would have to pay even if we weren't refinancing.

Definitely you need to feel secure, that is foremost. Does the current HELOC end soon and could those dollars then be deployed to build up more cash? That you have three months living expenses in cash already set aside is a good start. And remember it is usually possible to access equity and even your retirement funds in an unforseen dire emergency. So you are in better shape than most.

Which doesn't matter really. It is what you are comfortable with that matters.

I appreciate all the comments, both for and against. We decided to go for the refinance. The bottom line is that if we have more cash in hand I think we will be better off from many perspectives. We will have the flexibility of a fixed lower mortgage payment. If we find ourselves rolling in dough, we can pay it off earlier, but we won't have to. If necessary, we could even sell the house at a deeply reduced price from the current market value and still come out ahead.

Anyway, we're moving forward on this, and we'll see how it works out!