Look Beyond Interest Rates

Q: The general wisdom these days seems to be not to pay off one's mortgage but to keep it as long as possible and use the difference between shorter and longer-term payments to save and invest. We are getting ready to refinance from a 15-year to a 30-year loan for that reason, even though we're within 20 years of retirement. We are not exactly house-poor, but don't have a lot of extra cash and don't have a sufficient emergency fund. We are pretty frugal in general, with no big areas to cut costs and no debts. We are putting the max into retirement accounts. We have crunched the numbers and it makes sense to do this, yet I still wonder if we are being swayed by a trend and are missing something. -- Silver Spring

A: Barry Glassman, a financial planner with Cassaday & Co. in McLean: There are upsides to 30-year mortgages, especially in terms of flexibility if they have a "financial hiccup." But to determine whether this couple should refinance, I would ask a few more questions because paying down your mortgage is really about your comfort level during retirement.

They took out a 15-year mortgage for a reason. What's changed? Beyond that, run the numbers. If the interest rate on the new loan is the same or even lower, it could make sense. But if they are locking in a higher rate, compare it with the return on their investments. You also have to account for closing costs.

A lot of times when people are switching their mortgage from one type to another, they look just at the interest rate. But that's not an apples-to-apples comparison. It also depends on how long they have held that 15-year mortgage. If they have only eight years left, they're mainly paying down the principal. Go to a 30-year mortgage, and you're talking about really extending interest payments.

Stuart McHenry, a financial planner with Open Heart Financial in Waldorf: In almost all cases, my advice is not to refinance unless you can obtain a lower rate that would save the cost of the refinance in less than two years.

The main consideration in selecting a 15- or 30-year mortgage (providing I were comfortable with the payments) would be the rate itself. If the 15-year rate were the same as a 30-year rate, then I would recommend taking the 30-year and prepaying at will.

This couple probably obtained a rate well below any current 30-year fixed rate. If they were to refinance to a 30-year loan, they would be paying more interest. That in itself would narrow any cash-flow advantage that a longer term would offer.

Their loan amount would probably also increase to account for the closing costs, prepaid taxes and any cash-out they may take, thus the payment would go up, further narrowing the cash-flow advantage.

You would need to be a super investor to justify incurring the increased costs.

The emergency fund inadequacy can be easily cured by establishing a home equity line of credit. You pay interest only if you actually use some of your line of credit, so it becomes a cheap, flexible and effective way to give you financial power if you ever need it.