By Ilyce Glink

Every week, I receive e-mail from readers, visitors to ThinkGlink.com, and listeners to my radio show.

One of the big topics of conversation is figuring out when refinancing or prepaying your mortgage makes sense.

A few weeks ago, I dissected the numbers for one homeowner. It clearly struck a nerve. Here's a sample of the e-mails I received. If you'd like to share your story, you can post your comments to this story at ThinkGlink.com.

Q: In 1991, when the local newspaper had lists of foreclosures for sale every Friday, I bought a townhouse. But I didn't just save on the purchase price of the property.

I worked, at times, two jobs, and paid off a 30-year 9 percent fixed-rate mortgage in 7 1/2 years. I saved more than $70,000 in interest on the loan. Then, in 2002, I sold my house and upgraded to a home in Sun City Center, where I'm retired.

I don't have a question, but just wanted to say this: It always pays to eliminate debt.

A: Thanks for sharing your story. I'm sure more than one person will look at this and wonder: (1) how anyone could have even considered buying property when interest rates were 9 percent; and (2) why you didn't refinance in 1993, when interest rates fell to 6.5 percent. You would have paid off your loan even faster.

Regarding the first point, the interest rate on the first home I purchased was 11.75 percent, which we refinanced in 1991 to around 8 percent. It's amazing what you can do if you put your mind to it. Congratulations.

Q: I enjoyed your article "Does it still pay to pay off mortgage early?" I concur with all you wrote but would like to submit another reason, should you re-work this article for a future publication date.

Back in 1996 I built and financed my house for $125,000 with a 30-year fixed-rate mortgage at 9.5 percent. Subsequently, the interest rates started falling and I refinanced in 1997 at 8 percent and then again in 1999 at 6 percent. The goal, of course, was to reduce my monthly payment along with the implied reduced interest amount that would have been paid had I not refinanced.

So here we are in 2009, with interest rates at around 4.5 percent and again I am refinancing. The impetus is my impending retirement in 2 to 4 years. My goal is to have the fewest and lowest retirement costs possible.

Since I am 63 years old, statistically, what are the chances of me paying off my new 30 year mortgage before I die? Most insurance companies are fairly certain that I will die by age 83 to 85. Of course, I could die in the next hour or live to be 105, but statistically I'm certain to be gone in 30 years. That's 10 years longer than my life expectancy.

So for me, I will no longer add money for an additional principal payment to my regular monthly payment because my mortgage will outlive me and I will have the "additional principal payment" for my retirement uses.

So the short statement is, "If your life expectancy is less, or significantly less, than the mortgage term, do not add additional money to your mortgage payment and use/save the money for your living expenses, unless someone will still be living in the house after you are gone and you do not have some insurance/money policy that would cover the mortgage."

Of course, this statement is true whether you just refinanced or still have time to go on your mortgage and no matter what your age.

If you think I have made an error in judgment about forgoing "additional principal payment," then please advise.

A: Wow. I wish I knew for sure when you are going to die. I have had enough loss in my life to know for sure that none of us knows when the end is coming. While insurance companies are betting that you'll be gone in 20 years or so, one of the fastest-growing populations in this country is the 100-years-young crowd.

Turning to your question on mortgages, if you had been refinancing the balance only every time you refinanced your mortgage, but still paid the same monthly payment you were paying in 1996, when your interest rate was over 9 percent, I'm guessing that you would have paid off your mortgage balance already or you might be getting pretty close by now.

But like so many folks, it seems as though you started fresh every time you refinanced, which meant another 30-year term. While that lowered your monthly payment, it didn't do much for slicing years off the loan.

As I've often said, to refinance successfully, you should be able to do these three things: Lower the interest rate, lower your monthly payment, and shorten the loan term. If you only get two out of the three, choose the shorter loan term and lower interest rate -- you'll be better off down the road.

You're now down the road and trying to decide whether you should prepay this loan or keep the extra cash to live on. In this economy, cash is king. It's not that easy to get a home equity line of credit these days, so I think you should keep the cash.

But I wish you had written me back in 1997. I would have told you to refinance to a 15-year term, and keep prepaying through every subsequent refinance. By now, you'd be mortgage-free for your retirement years and the entire amount you are now paying to your lender could be used for other retirement expenses.

Q: I retired in 1990, and my wife and I own our home. The subject of your recent column on prepaying your mortgage is no longer a realistic matter for us, but it certainly was when I bought my first house in 1963. At that time the interest rate I was paying was 5.25 percent for 30 years on a house that cost us $23,000.

In subsequent years -- won't go into details -- the current bank (that changed more than once) would occasionally try to entice me to pay off the mortgage. That was, of course, at a time when the mortgage interest rates were higher, and going up. I always chose to not pay off that mortgage.

But the difference, as I saw it and still see it, was that I had a young family, no money, and we lived hand to mouth, so to speak. For some years, I supplemented my income with borrowed money. The money I was able to borrow was borrowed at rates much higher than 5.25 percent. Therefore it seemed wise to me at the time not to try to pay off the mortgage. (Many years later I did pay off the loan.)

We were, and to some extent still are, a frugal family. We practiced self-denial at the time. I am thankful that we have long since been able to afford a good lifestyle.

So, without belaboring it, if this approach was right under the circumstances, I can imagine that many a young and responsible family today (forgetting for the moment the -- I hope -- unusual financial circumstances we have right now) will need to borrow money from time to time, too. And, if this thesis, also in your opinion, is correct, I believe that it should have been mentioned in your article, even realizing that you had space limitations.

A: Thanks for your comment. I agree that there are times in life where you make choices between unpalatable options. Clearly, you were able to manage the money you borrowed, and were ultimately able to pay it off and then build a solid financial life. Not everyone has the wherewithal or financial savvy to pull that off. So, kudos to you.

In general, I've found that there are several kinds of borrowers: Those who don't mind making their monthly payments (and who invest anything left over in other investments); those who have enough cash to just make their monthly payments; and, those who can't stand debt and work to pay off their mortgage as quickly as possible.

I think there's room for all of these sorts of financial choices. My favorite part of your letter is when you describe yourself as a "frugal family" who practiced "self-denial" when you needed to. Being frugal is, in my mind, a badge of honor -- and a talent not enough Americans seem to value. I hate to waste money. I'd much rather choose where to spend it than have it dribble away.

Thanks for sharing your story

 

 

NEWS & CURRENT EVENTS ...

WORLD | AFRICA | ASIA | EUROPE | LATIN AMERICA | MIDDLE EAST | UNITED STATES | ECONOMICS | EDUCATION | ENVIRONMENT | FOREIGN POLICY | POLITICS

 

Real Estate | Paying Off the Mortgage: Readers Tell Their Stories