QUESTION: I have five years left until I pay off my 30-year mortgage. I received an offer to refinance, which certainly is tempting, but I’m getting pretty close to retirement. Should I lighten my burden now or try to hold on for five more years?
ANSWER: While a lower payment would be appealing, I think you should try to avoid refinancing, if at all possible. Mortgage loans are amortized, which means you spend the early years paying most of the interest for the entire loan. In the later years, your payments are almost entirely principal.
You’re nearly home free — literally. You will have a much easier retirement without having to make those house payments. You can use the extra money to enjoy life. There is great security in owning your home free and clear. If you do end up needing money in retirement, you could always tap into your home’s equity through a reverse mortgage and still not have a monthly payment.
But if you absolutely need a lower payment now, you should try to refinance with as small of a loan as you can for the least amount of years.
For example, if your original loan had a monthly payment of $1,000 with a 6.5 percent interest rate, you could refinance with a 10-year loan at current rates and lower your payment to only $500 a month. But remember that while you would be cutting your payment in half, you’d also be on the hook for an extra five years. Is that worth it?