Is Refinancing a Good Idea?
Posted by Jennifer Lane on June 4, 2009 · Leave a Comment
Jennifer Lane, Compass Planning
Jennifer Responds to a Viewer Question from: Virginia in Fountain Hills, Arizona
Dear Jennifer,
Should I save interest costs by paying extra on my mortgage principal or refinance to a lower rate?
I owe $209,000 with 26 years to go at 5.5 percent. The house is worth about $280,000. I’m a retired teacher with pension and social security. My CDs get very little interest so I’m thinking of putting $10,000 from savings on the mortgage principal. On the other hand, the bank has a no fee mortgage at 5.25 percent. I could refinance and save interest now, but since this would reset the term at 30 years, I’ll pay extra if I stay in this house for a long time.
Hi Virginia
I agree, rather than restarting the 30 year clock by refinancing, paying down principal with extra cash is a good idea. Be sure you’re leaving yourself enough cash in case of emergencies, though. Retirees should have liquid cash equal to 6 to 12 months of withdrawals to supplement pension and Social Security income. That way, if an emergency costs you some of that cash you won’t jeopardize being able to continue withdrawals and you’ll limit needing to sell less liquid investments when they’re down in value. Soon enough interest rates will be higher and you’ll be happier with your CD rates. Unfortunately, that will also mean that inflation has increased some so watch your budget 
If you’re planning to stay in your home longer than 5 years, make paying down principal more of a focus. This is an important way to save money over the long term. Are there any expenses – like a car payment – that will end soon so you can divert extra money to the mortgage principal? Is there a less important expense you can reduce or eliminate to clear-up cash to pay down the mortgage?
I lived in Arizona for 10 years…Fountain Hills is a lovely area.
Best,
Jenn
Jennifer is the founder of Compass Planning, and a weekly commentator on NECN’s Business Day at 6:30 p.m. Look for her every Tuesday, or check out her blog, Jennifer’s Compass.