Posts Tagged ‘savings’

Extra Money? What’s better – save more for retirement or pay off your mortgage?

Wednesday, March 18th, 2009

Is your Mortgage longer than your Career?

So you think you are doing fine, you have extra money each month, you are saving pre-tax 401K money for retirement and you are making your mortgage payments and every once in a while putting more into the principle.  The question comes up – what to do with the extra money,  should you put more into your mortgage or should you put more away for retirement.  I would say that most people think they should be putting more into savings but oftentimes that is incorrect.  The fear is more real because remember no one is going to give you a loan for your retirement and with what we keep hearing about social security going bankrupt at some point in the future the fear that we will have to live with the kids and eat top ramen each day surfaces.

One of my clients had that same question and we ran an E-Trades Retirement Quickplanner and came up with this interesting scenario.  Carol (name changed) earned about 90K in salary, has about $220K in retirement and savings.  She has 26 years left on her mortgage but is 13 years away from retiring.  She has about $500 each month to decide what to do with.  She is already putting about $500 a month into her 401K.

In this first picture if she spends the $500 and doesn’t save any of it then she will have a shortage of retirement funds in the amount of $193K



Scary, I know.  Let’s say she decides to plow $500 more dollars into her retirement accounts each month.  What will that do to that shortage?  Well the shortage drops to $99K.  Better but not good enough.


Okay, let’s back up a bit and put that extra $500 into paying the mortgage off.  With United First Financial’s MMA system that 25.6 year mortgage will be paid off in less than 13 years so Carol will go into retirement without her $1500 mortgage payment (expenses lowered to $3250).  Look at that!!  Carol no longer has a shortage but now she has a surplus of $110K

 This was so clear for Carol’s situation (I’m not saying this is what everyone should do).  Using the UFirst MMA her mortgage will be paid off before she enters retirement and so her largest expense will be eliminated and her retirement savings will be able to stretch and cover that much more.  Carol is a firm believer now that she is on the MMA.








Refinance the mortgage or not? It’s not always the best.

Tuesday, January 27th, 2009

The many mortgage brokers that call me all tell me the same thing, with interest rates as low as they are now and by the way they are only going to go up, isn’t it time for you to refinance and lock in that new low rate?

What they don’t tell you is that more than half of the refinance candidates would be better off financially not refinancing.  The brokers get paid on every refi so asking them if it is beneficial to you to refinance is not the best advice.  The mortgage professionals typically point out the low interest rate and the lower monthly payment but nothing else.  They don’t tell you that if you are refinancing a twenty-seven year mortgage that you are increasing your payments by three years!!  Also, when the broker is talking they often say that the refinance will be no out of pocket expense to you and you are thinking cool, no cost.  But that is misleading.  The costs are often rolled into the mortgage balance.

Most folks when looking at whether they should refinance or not look at only the interest rate and the lower monthly payment.  And most often the decision is made on just the monthly payment reduction.  Even the refinance calculators do not show you the total costs of a refinance.  All they give you is the monthly payment savings amount and then divide that by the cost of the refi and then in summary give you the number of months to recoup the initial cost.  That always is some number of months so that calculation always shows you that it is beneficial to refinance (assuming the new monthly payment is lower than the original payment).

They conveniently forget to show you that now your mortgage term is now longer and so your overall cost over the life of your loan is higher.  But if you look at the longer duration of the mortgage and take the mortgage payment and times it by the increased number of payments you get a rather large number.  But since you have a monthly payment savings you divide that large number by the monthly savings to get a number of months it will take to break even.  So it would make sense to refinance to a lower interest rate loan if you plan on keeping your loan longer than the break even point.

If you are familiar with United First Financial MMA program there is one other calculation that can be done to insure that it would be beneficial to refinance or not.  Your agent can run the new numbers through the Analysis software.  The Analysis takes into account the lower interest rate, the longer mortgage duration, and the increased cash flow created by the monthly savings rate.  Then and only then can you be sure the refinance would be beneficial.

Don’t be taken by a lower monthly payment.  Always ask for the TOTAL COSTS.