Monday, June 7, 2010

Refinance or Reamortize Your Mortgage?

When you’re just starting out, the best mortgage is often one that lets you make lower payments in the early years and bump them up them as your career takes off and your earnings increase. And there are many interest-only and ARM products available to meet this need. But what about as you near retirement? Is there a product for you, too?
Not really. The best mortgage for somewhat at the end of a career would let you pay more at the beginning, when you are in your peak earning years, and taper off to a lower payment when the pension kicks in. And there’s no such animal. Unless you create it yourself.
Prepaying Your Mortgage Now Gives You a Cushion Later
Once your retirement is fully funded, concentrate on prepaying your mortgage as much as you can afford. If you can refinance to a 15-year loan, by all means do so. If not, make whatever principal reduction payments you can. Say for example that you refinance today to a 30-year loan at 5.25%, and you plan on retiring in ten years. Your balance is $300,000. Using a mortgage amortization calculator, you can see that your payment is $1,657 per month and in ten years your balance would be $245,845. But you’re earning enough to pay $2,500 a month without causing yourself undue pain. So you add $843 to your payment. In ten years, your balance is only $113,176.
Now, here’s the good part. You don’t want to pay $2,500 when you’re retired. You don’t want to pay $1,657 either. By having your lender re-amortize your loan (many will do it for a $250 fee), you get a payment obligation of only $763 per month. This is because your prepaid balance is stretched out over the remaining 20-year term of your home loan, allowing you to pay more when you have it and less when you don’t.


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