Buying A Home Or Refinancing? When A 30-Year Mortgage May Not Be The Best Choice

(Photo: Erda Estremera/Unsplash)

Buying a new home or refinancing? You’ve probably wondered whether you should get a mortgage, and if so, what kind?

That’s one of the most common questions we get from clients.

Veteran financial reporter Jeanne Sahadi did a great job exploring the topic for CNN in an October 21 article for CNNBusiness. We talked to her last week in a wide-ranging interview on the subject.

Should you opt for a 30-year mortgage?

In the article, Jeanne covers the pros and cons of a 30-year mortgage. “Most people get a 30-year fixed rate mortgage, which offers lower monthly payments,” writes Jeanne.

But a 30-year mortgage will cost you more in interest over the life of the loan. It’s still the best choice if you have difficulty qualifying or have uncertain cash flow. Don’t forget, you can always pay your mortgage down faster – for free – by making extra principal payments.

If you have ample cash flow, you might want to think about a 15- or 20-year mortgage. But before you opt for a short-term mortgage, Mari advised, “make sure you can make the bigger monthly payments without question.” The last thing you want to do is struggle to pay the mortgage or default.

Refinancing tips

If you are refinancing, don’t make the rookie’s mistake of swapping into a new 30-year mortgage. That just starts the interest clock running again.

“If you have 10 years left, refinance for 10 years. [Otherwise] you’re paying the highest amount of [total] interest. Just replace what you’ve got left on the clock unless there’s an extenuating circumstance,” Mari recommended.

What’s an extenuating circumstance? You may worry about an unexpected hit to your finances, such as a job loss or divorce, which could put you at risk of losing your house unless you can cut your monthly payments substantially, writes Jeanne.

Should you pay off the mortgage before retirement?

If you are getting close to retirement, should you hustle to pay off that mortgage so you can leave more of a legacy to the kids or perhaps become debt-free?

By all means, opt for a shorter-term mortgage, but think twice about paying off the mortgage entirely, Mari cautioned.

Using cash reserves to pay down the mortgage can leave some people cash-poor. And once your money is locked in the house, it may be hard to get it back out again when you need it to pay bills. And let’s face it, today’s ultra-low mortgage rates are a bargain.

If you keep excess cash in a bank account earning nothing, by all means use that cash to pay down a higher rate mortgage. But if you prefer to use your funds to invest in a diversified retirement portfolio that has the potential to grow and earn income, you may not want to mess with a good thing, especially now that inflation is more of a concern. With inflation, you need to focus on investing in assets that can grow in value. Your fixed-rate mortgage stays locked in at yesterday’s low rates, and each month’s payment will cost you less and less in after-inflation dollars.

Having a mortgage “is not about your age,” Mari told Jeanne in the interview. “It’s about what leaves you in the best position to use your money wisely. Cash poor is not smart. Having cash in your pocket to have a better life when you’re older [is].”

And don’t feel guilty about the kids. “Your kids can sort through their own lives,” said Mari.

You can check out Jeanne’s entire article on CNNBusiness.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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