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Mortgage Q&A: Refinancing to save up for college

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Q. We would like to refinance our mortgage and take advantage of the lower 30-year fixed rates. Our goal is to lower our monthly mortgage payment as much as possible and put the difference into our college savings plan. We plan to be in our home for at least 12 to 15 more years.

I also would like to ask for your financial advice. Since our goal is to save money for college for our four children, do you recommend that we take cash out with our refinance? All four of our children will be entering college in the next six to nine years.

Here are our specifics. Our loan balance is $280,000, our existing rate is 4.875 percent, our monthly principal-and-interest payment is $1,546 and our home is worth at least $500,000.

Any helpful advice would be appreciated.

A. Congratulations on thinking ahead and working on a plan. I am experiencing my first year with both of my children in college, and I can tell you that it's expensive -- and one of my children goes to an in-state, supposedly "inexpensive," school. Let's get to your situation.

First, we already know you need to refinance. If you decide to take no cash out, you can reduce your rate to the range of 3.50 percent to 3.75 percent with little or no fees. If you want to lower your payment, refinancing your $280,000 loan to 3.75 percent with no closing costs will drop your principal-and-interest (P&I) payment to $1,296, a drop of $249 each month. So you definitely can lower your payment and invest the difference in a college fund.

Pursuant to our conversation on the phone today, your second question was intriguing and makes for a great column. The question is simple: Does it make sense to take advantage of what are perhaps the lowest long-term mortgage rates that we will ever see, borrow money and stash it away to pay for some hefty college bills in 2018?

You may have a very good idea, but the answer, as always, depends on the unknown future.

Let's run the numbers.

Refinancing your existing balance results in a $249 monthly deposit into a college fund for the next 72 months. If that fund yields 3 percent, the balance in six years is $19,616. At 6 percent, the balance would jump to $21,515. Your mortgage balance at the end of six years would be $246,007.

At 3.75 percent, keeping your monthly payment the same at $1,546 would allow you to borrow $334,000, allowing you to open a college investment fund of $54,000. If this sum is invested at 3 percent, with no extra payments into the fund, the college fund increases to $64,635. At 6 percent, the balance would be $77,330. Meanwhile, your mortgage balance drops to $293,452 in six years.

You have plenty of equity in your home. Assuming you have a balanced financial picture and good income stability, I certainly cannot say that borrowing tax-deductible money to take care of some future college expenses is a bad idea. It's probably a great idea.

You don't know where student loan or mortgage loan rates will be in six years. Locking in tax-deductible fixed-rate money to the tune of $54,000 with no change in a monthly obligation at 3.75 percent probably will be thought of as a heck of a deal in six years. I'm no financial adviser, but I would bet a reasonable, conservative investment over six years likely will at least earn the after-tax equivalent of your cost of the money, which is likely to be only about 2.75 percent.

At the end of the journey, you have a lot more money in your college fund but less equity in your home. The bottom line is you're still greatly helping to pay for your children's college. You've got to love your children. My checks go out all the time, and I'm hoping they're learning a thing or two.

Henry Savage is president of PMC Mortgage in Alexandria. Send email to henrysavage@pmcmortgage.com.

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