We recently received a long comment on one of our questions regarding a homeowner who was deciding whether to refinance their home before retiring. Our correspondent is a mortgage industry veteran of many years and we thought you’d benefit from his perspective.
(And, we’ll just add that hearing from our readers, whether directly through Ilyce’s website, ThinkGlink.com, or via the comments section of our various news outlets, never gets old. We learn something new from you every week and will continue to publish your comments as part of our ongoing conversation on real estate.)
Here’s the email we received, edited somewhat for clarity and length:
COMMENT: I have more than 50 years of mortgage banking experience, including writing many of the federal regulations and mortgage loan guidelines. I wanted to comment on your recent article in my local paper, where you responded to a couple who were considering refinancing their home around the time of their retirement. While I appreciated your response, there are some very important things they need to consider.
The first is something that you alluded to in your response. They wrote that there was something in their credit report causing some lenders to suggest a slightly higher rate. The homeowner should pay the fee to get a full credit report, including their credit score, from a credit reporting agency so that they know exactly what is in their report and what may be impacting their interest rate.
Second, since the husband is considering retirement, he should not retire until they have completed the refinance. Third, they should not apply for any new credit or make any other change to their financial standing until after the refinance has closed.
Fourth, and perhaps the most important, they should seriously consider a 30-year fixed rate loan (even at their age) for a number of reasons: The required monthly installment will be much lower than the required payment on a 15-year or 10-year loan; and, they can always add additional principal to each monthly payment to effectively create a shorter term loan without the pressure of having a required higher monthly payment.
While the interest rate or the payment amount may not be important at the moment, both could be profoundly important if the homeowners have a significant change in their financial situation in the future. For example, if either the husband or wife passes away and their income dramatically decreases.
Since they can always pay additional principal with each monthly installment, they can virtually choose any repayment term they want and stop making the extra principal payment if they need to reduce their monthly expenses at some time in the future.
Some other options they may consider: Some lenders may give them the choice of paying a slightly higher interest rate in return for no closing costs. The interest is tax deductible, where many of the closing costs may not be deductible. This same logic applies to the higher interest rate they may pay for a 30-year loan versus a shorter term loan or paying a higher interest rate rather than paying some of the closing costs.
Since the amount of the interest that they can deduct is directly related to the level of their taxable income, the higher interest rate may not actually cost them very much more than a lower interest rate. That will be particularly relevant if the husband, in this case, chooses to retire and their taxable income and tax liability both decline.
RESPONSE FROM ILYCE AND SAM: Thank you for the insights. With the higher standard deduction this will likely eliminate their ability to deduct mortgage interest unless their medical expenses are extremely high.
(Ilyce Glink is the author of “100 Questions Every First-Time Home Buyer Should Ask” (4th Edition). She is also the CEO of Best Money Moves, an app that employers provide to employees to measure and dial down financial stress. Samuel J. Tamkin is a Chicago-based real estate attorney. Contact Ilyce and Sam through her website, ThinkGlink.com.)
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