We want our golden years to be without debt. But among experts there is a debate on the pros and cons of not just paying off a mortgage early but also knocking off years in interest by forgoing the traditional 30-year home loan.
Last week, Chris Hogan, author of “Retire Inspired,” the Color of Money Book Club pick for last month, joined me online to take reader questions. Here are his answers to some leftover chat questions and his view of the mortgage-term debate.
Refinancing to a longer-term mortgage, Part 1
Q: We got our original mortgage back in 2012 with a bad interest rate of 5 percent. It was an FHA loan, because we couldn’t afford 20 percent down and got stuck paying PMI. My husband and I are refinancing with a better rate of 3.5 percent, which I’m much happier about. We are supposed to refinance to a 25-year loan. However, if I want I can get a fixed 30-year for a much lower payment (about $300/month lower). The interest rate would remain the same, and there is no prepayment penalty. Besides having to pay a little more in interest over the entire length of the loan, what other disadvantage is there? We’re tempted to do the 30-year with the notion of continuing to pay more on it. The additional money that we’d be saving would be to finish paying off debt. Once that’s taken care of (one more year), we’ll then throw any additional money to the mortgage. It makes sense to me, but what am I missing or not seeing?
Hogan: The 25-year, fixed-rate mortgage is better than the 30-year, but the best option is a 15-year fixed-rate. A lot of people intend to pay more on the 30, but life ends up happening, and they don’t. Get a quote on a 15, and sit down with your spouse to see if this is something you could make work now. It may require you to find extra income and/or scale back lifestyle, but it will save 15 years of payments. To put that in perspective, let’s say you have a $225,000 loan at 6 percent. On a 30-year mortgage, your payment would be around $1,300 a month. But on a 15-year fixed, your payment would be around $1,800. So you’d save $500 a month on the 30-year, but over the life of the loan you’d save around $140,000 going with the 15-year.
Refinancing to a longer-term mortgage, Part 2
Q: I respectfully disagree with Hogan on the refinancing answer. It sounds to me as if the person asking the question has excellent financial discipline, and a plan. In this situation, taking a 30-year mortgage with a defined plan of paying it off early makes a lot of sense. Why? It lowers the risk of defaulting on the loan. Let’s imagine one or both of them take a significant hit on their salary for an extended time. With a 30-year mortgage, they can simply drop the prepayment until they are back on their feet (been there, done that). With a 15-year mortgage, they are stuck with paying the higher premiums. So isn’t the 30-year better?
Hogan: As a former banker, I have seen people “intend” to pay extra on a 30-year mortgage and eventually fall back to making the minimum payment. Lifestyle and “wants” can get in the way of achieving a long-term goal if there’s an option to pay. The goal is to end up owning the home and paying much less overall!
Q: After years of saving, working hard and climbing the corporate ladder, my husband and I are lucky enough to reach a point financially that I don’t have to work (he loves his job and would continue working). I am only 38 and would like to “downshift” my life and find work that I am truly passionate about but probably doesn’t pay as much. The problem is, I am finding it hard to walk away from the big paycheck and to explain it to relatives. Do you have any advice on how to focus on the quality of life rather than the paycheck?
Hogan: Making a good income can be difficult to walk away from. But in this situation, I think the focus should be more on what you are GOING toward! You mention pursuing something that you are passionate about! I think you have earned the right to pursue your passion and find fulfillment. There is no reason to “explain” things to relatives. I think you just tell them how excited you are about your new pursuits!
My parents recently told us about their financial situation . . .
Q: My parents are fine for now, but they are thinking about assisted living, and that is expensive. I had NO idea they only have $2,900 a month from Social Security after their Medicare premiums are taken out. That is for the both of them. So scary that many people are relying on just that for retirement income. Any advice?
Hogan: I am sorry to hear about your parents’ financial situation. But, I am glad that they are willing to talk to you about their finances. Unfortunately, too many people are finding themselves relying solely on Social Security. Talk with your parents about their budgeting, debt load and their investing. I tell people all the time: It’s never too early to start saving for retirement, and it’s never too late to start working a plan!
Still not sure what to do? Here’s some reading to help you decide which mortgage is right.
“Debt can be stressful at any time, but even more so in retirement,” says certified financial planner Ken Moraif. “I can tell when my clients have paid off their mortgages. Their body language changes. They’re more relaxed.”
Retirement Rants and Raves
I’m interested in your experiences or concerns about retirement or aging. This space is yours. It’s a chance for you to express what’s on your mind. Send your comments to firstname.lastname@example.org. Please include your name, city and state. In the subject line put “Retirement Rants and Raves.”
Some of you wanted to share your feelings about the recent announcement that Social Security checks would be getting a cost-of-living increase.
“I am one of the people that have only their Social Security check to live on,” wrote John Wertenbach from Virginia. “I have been disabled and unable to work since 2007 after a motorcycle accident. I am 67, a veteran, three tours in Vietnam. My Social Security check is $1,400, and with the COLA it will be an additional $28 dollars, which will be absorbed by the cost of Medicare insurance. My house payment is $700, utility bills run about $200, and I have cable at about a $100 a month. This leaves me with $400 a month for groceries, newspaper and any incidentals that come up such as auto registration, auto inspections, insurance and other expenses. I have no money the last two weeks every month because I have to eat, and money has to be spent wisely, I eat a lot of mac and cheese. You can stretch that dollar a lot if you must. There have been months where I go hungry the last week of the month because of those incidental payments that pop up. I guess it’s better than nothing, and I know a lot of people are worse off than me, but it’s very hard to live like this. But what other option is there?”
I know so many of us appreciate the sacrifices of our armed forces. Here are some military resources.
Mary Phillpotts of Leominster, Mass., wrote: “I only get $400 month in Social Security. With the COLA, does this mean I’ll get a whopping $9 a month more? Yippee! I thank my lucky stars frequently that I have a pension and saved money and that we paid off our house way early.”
“I’m one of the lucky ones, it seems,” said Dennis Quillen of Hattiesburg, Miss. “From the days of my first jobs, part-time first, permanent second, I always understood that SS benefits were to be a supplement, not a coverall benefit. Through my career I paid into Social Security as required, paid in regularly to the state retirement fund, and later, I took out additional funds for 403 (b) plans. I now have a comfortable retirement income, good medical benefits, and Social Security is a relatively small part of my yearly income. I appreciate the supplement, of course, but I don’t depend upon it. I am sorry that so many of my fellow seniors sometimes find themselves in a financial bind.”
“As you have given us the chance to ‘rant and rave’ about retirement, I wanted to take you up on it,” wrote C.V. of Walkersville, Md. “Is the Social Security increase big enough? My answer is an emphatic and resounding, ‘No!’ You see, Michelle, I am not retired, but my 62-year-old husband of 39 years is. He was ‘forced’ into retirement after suffering a stroke in 2016. Prior to that, in 2014 he was laid off due to a downsizing by his company Lockheed Martin. He rolled his retirement over into an IRA. He went back to work for another company in 2015. Now I don’t blame the government or Social Security for what I am about to say — just still ranting. Against my protests, my husband during the time he was laid off began to use his retirement funds after his unemployment ran out. So not being at retirement age, he was penalized royally for it. Then he didn’t report some of the rolled-over money when we completed our 2015 taxes, so we are trying to pay the IRS more than $10,000. All of his retirement funds are gone.”
C.V. continues: “My husband receives about $1,600 a month from Social Security. When he pays his medical bills (I carry him on my medical insurance, but there are still out-of-pocket costs), the IRS, and other bills, his money is gone in two to three days. He can’t even afford to own a car. If he were not married, he would be homeless. After having a two-income family all of our married life, suddenly there is one income supporting the weight of expenses accumulated when two were working. I know we have to make decisions to downsize, but we are struggling. Therefore, I continue to work — a federal position with 30 years of service. My retirement, thank God, is intact, but meant for one — not two — to live off. How will we ever survive? Not sure there is a ready solution, but venting has helped. Thank you for listening.”
Newsletter Comments Policy
Please note it is my personal policy to identify readers who respond to questions I ask in my newsletters. I find it encourages thoughtful and civil conversation. I want my newsletters to be a safe place to express your opinion. On sensitive matters or upon request, I’m happy to include just your first name and/or last initial. But I prefer not to post anonymous comments (I do make exceptions when I’m asking questions that might reveal sensitive information or cause conflict).
Have a question about your finances? Michelle Singletary has a weekly live chat every Thursday at noon where she discusses financial dilemmas with readers. You can also write to Michelle directly by sending an email to email@example.com. Personal responses may not be possible, and comments or questions may be used in a future column, with the writer’s name, unless otherwise requested. To read more Color of Money columns, go here.
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