Q: I am 57 and my husband is 62. We would like to borrow $25,000 to help pay for a wedding for our daughter.
We bought a townhome in 2004 for $230,000 at 5.25 percent interest. We work, and my husband gets a pension and Social Security. Our credit scores are in the mid-600s to mid-700s.
We spoke with a loan specialist at a bank, and his advice was not to refinance, as the costs would be too high. He said a home equity loan would be better to avoid the fees. But the home equity loan would not give us enough for the wedding.
My husband suggested that I take money from my 401(k) and pay the penalty and taxes to get the money. Do you think that, at our age, refinancing would be smart? Also, could we consider a reverse mortgage?
A: First of all, congratulations to your daughter. However, what you’re considering is mortgaging your retirement and future financial security in order to help pay for a wedding. We can’t get behind that. If you can’t afford to spend $25,000, you shouldn’t be thinking about raiding your 401(k) or refinancing your home to do it.
Instead, you should be honest with your daughter about what you can afford and ask her to reconsider the budget for the wedding. If you can afford to give only $10,000, that is what you should contribute. Otherwise, you are hurting yourself in the long run.
Nevertheless, since there are other homeowners in your same position, let’s look more closely at the options you have raised:
First, reverse mortgages provide cash to homeowners whose homes are paid off or almost paid off. However, these mortgages are difficult to get right now, and extremely expensive. More to the point, if you don’t have enough equity to take out a $25,000 home loan, a reverse mortgage will be totally out of the question.
If you had more equity, a home equity line of credit would be a real option. The costs are low, but typically the interest rate is variable. That’s fine for now, when interest rates are at historic lows, but it could become a real problem if you don’t get the loan paid off quickly.
Refinancing is an option, but it’s expensive. Also, if you borrow more than 80 percent of the home’s value, you’ll pay private mortgage insurance, which could raise your mortgage payment by more than $100 per month. That would completely offset any savings you’d get from refinancing, and you would have to pay some (or a lot) of costs out of pocket.
You might find a lender willing to bump up the interest rate you might otherwise pay to cover the costs of refinancing your loan. You would need to evaluate the length of the loan and the costs of refinancing to see if it would be worthwhile for you. If you shop around long enough, you might find a lender willing to refinance at a substantially lower rate with fees that would fit your budget.
You don’t want to refinance, however, and add eight years of payments to your loan if you don’t have to. You have about 22 years left on your loan, and taking out a new 30-year loan will add thousands of dollars to your payments over those years.
Lastly, it would be a mistake to take money from your retirement account. You will pay a 10 percent penalty, and the $25,000 you take out may bump up your tax rate. If your tax rate is 25 percent, you will have to pay the $2,500 penalty and a $6,250 tax, a total of $8,850 on a $25,000 withdrawal. That seems like a bad idea.
The smartest option is to be honest with your daughter about your financial circumstances. The best gift you can give is to avoid putting your financial future at risk; you do not want one day to have to rely on your daughter and her new husband to bail you out.
Ilyce R. Glink is an author and nationally syndicated columnist. Her latest book is “Buy, Close, Move In!” Samuel J. Tamkin is a real estate lawyer in Chicago. If you have questions for them, write to Real Estate Matters Syndicate, P.O. Box 366, Glencoe, Ill. 60022, or contact them through ThinkGlink.com.