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Jul 6 2010 12:00AM

Question


I am thinking about refinancing my house. I owe $69,000 at 6.5 percent. I would like to include a $10,000 student loan to this mortgage and make it a total of $79,000. I have about $30,000 in an Individual Retirement Account (IRA). I thought about taking money out of the IRA and applying it to the loan which would bring the total down to about $50,000. I am 60½ years old and would like to retire at age 62. Would this be a good idea or what is your suggestion?

Answer


“As you approach retirement, there are several things to keep in mind,” said FPA member Chia-Li Chien, CFP®, CRPC, PMP, the founder and chief strategist of Chien Associates LLC. “Your source of retirement income is your top priority. This can come from your pension, IRA, 401(k) plan, Social Security (if you opt to claim benefits at the Early Retirement Age), and the like.”

So the big question is this: Can your retirement resources cover your living expenses? Until you know the answer to this question, it’s not prudent to discuss your refinancing question in a vacuum.

With that caveat in mind, Chien did note the following: “In ideal situation, you don’t want to have any debt prior to retirement,” she said. “However, your top priority is really to figure out your living expense and if your retirement resource can cover that expense.”
 
“The rule of thumb of refinancing is if the new interest rate is 1.5 percent lower than your current rate,” said Chien. “Please keep in mind, when you refinance, you’ll start a new term. That means, you’ll start a new 15- or 30-year mortgage. It’s always interest you’re paying off at early years of the mortgage.”
 
As for the IRA, she said it’s designed to provide income during retirement, not to pay off your mortgage. Why? “Because, you have to pay income tax first before you can pay your mortgage,” she said. “That means your $30,000 IRA is not the same amount when you withdraw. It depends on your tax bracket, but you may end up paying for lots of unnecessary income tax. That may not be the result of what you’re looking for.”

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