We have a 30-year fixed $650,000 mortgage at 4.2%.

We have a 30-year fixed $650,000 mortgage at 4.2%.
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#1

Would we end up with more money at the end of 30 years if we refinanced to a 15-year mortgage and stopped paying into our retirement funds during some of these years, or should we stick with a 30-year mortgage?

I am 34 and my husband is 38. We are almost one year into our current mortgage. After buying the house, we no longer have a safety net saved up, so we are rebuilding that. We have been and still make the maximum contributions we can both make to our Roths as well as traditional IRAs, so we are saving about 15% total of our income towards retirement every month. We can afford the new mortgage payment and continue saving towards retirement, but we will not have any money left over to contribute towards our safety net. If we refinance, it will be tight.


#2

Hi,

I am not a fan of 15 year fixed mortgages for many reasons; cash flow like you mentioned being one of them. I recently wrote in my blog about a 30 year versus 15 year mortgage which may answer some of your questions. You can check it out here

What I didn't touch on in that article too much was the after tax cost of a mortgage. The 30 year has far higher tax deductibility and for a longer period of time, making it even more attractive.

I hope this helps

David


#3

I can’t get excited about keeping a mortgage around to generate a tax deduction for the simple reason that there are other ways to generate the same deduction amount. Your mortgage should not be tax driven. It should be justified by a comprehensive analysis, not on tax issues alone.

Paying off your mortgage as quickly as possible is certainly a noble goal, and I applaud you for thinking in that direction. Given the facts you provided, it sounds like cash flow will be a problem. I certainly don’t recommend a strategy that means cutting out retirement contributions, even for a short while. The better alternative may be to simply pay extra on your existing mortgage. You’ll save on interest doing that just like you would with a 15 year mortgage, but without the closing costs. That way if you do run into a cash flow problem, you can cut back a little on your mortgage payment and still be ok.

If cash flow really is a problem, then there could be other issues in your finances creating a problem, or you might be in too much house. Perhaps a financial checkup is in order with a qualified financial planner.


#4

You are doing a great job of saving. If you are not in a 401k plan - with a match - you really should be saving about 20% at your age. Although, I would need more information to determine this.

You can get to about the same place with your total outlay if you just make one more payment each year. You might be able to get a lower rate - which would be very beneficial. But it sounds like it would put a lot more pressure on your budget. If you do the math - you will see there is little net difference between the two if you make the extra payment.

Hope this helps.


#5

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