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Mar 29 2010 12:00AM

Question


We have $130,000 remaining in mortgage principle on our house at seven percent interest, with 13 years remaining. I am eight to 10 years from retirement and have ample investment funds for retirement. For our 28 percent tax bracket, are we better off refinancing to a 10-year fixed loan at current rates and investing over this term, or using $130,000 of cash to pay off the mortgage?

Answer


According to FPA member Tim Murray, CFP®, of Murray Financial, "it's a great question with no real right answer."

"First," he said, "your current mortgage rate, seven percent, is higher than the prevailing rates. So if you kept the loan, refinancing to a lower rate may be advisable, depending on what the new rate is." For his part, Murray is fond of "no cost" or "very low-cost" refinancing since it is never known whether or not you would need to, or want to, refinance again. "If you do refinance again before recovering those costs, you've wasted them," he said. Also, he noted, points on a refinance are only deductible over the life of the loan.

That said, he noted that it's difficult to give you a complete answer partly because he doesn't really know what 'ample investment funds' means. "Is that $500,000 or $5 million?" Murray asked. "If the $130,000 sitting in cash is going to remain in cash, paying zero percent interest and losing buying power by the day due to inflation, then paying off the loan would certainly be advisable as long as you have adequate liquidity for emergencies," he said. "If your retirement assets, including the $130,000 now in cash, could be invested in a diversified portfolio of low-cost, index-based Exchange Traded Funds (ETFs) at a stock/bond ratio that matches your risk tolerance, then it may be better to do a very low-cost refinance with a 10-year loan, utilize the income tax deductions from the mortgage, and let your portfolio grow at a rate that may be higher than what your loan is costing you."

According to Murray, "A well-diversified portfolio with a stock fund exposure higher than 50 percent has typically performed better, long-term, than prevailing after-tax mortgage interest rates."

Of course, there are a lot of variables involved and the only way to answer your question is to gather much more data about your finances.

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