- The Washington Times - Thursday, January 6, 2005

Q: I am a single woman with a good job and a nice salary. I’m hoping to retire in

about 15 years, when I turn 65. I have a five-year balloon mortgage at 6.25 percent with a balance of $150,000.

I’m thinking of converting this mortgage to a 15-year fixed so it will be paid off. I don’t plan on selling anytime soon. The house is worth at least $400,000 and I have more than $100,000 in tax-deferred retirement accounts. I don’t have any other savings accounts.

I mentioned my plan to a friend, and she said that my priority should be to build up my savings account before paying down the mortgage. I always thought that you shouldn’t have a mortgage when you retire. Any advice?

A: I tend to agree with your friend. Your financial picture seems a bit out of balance to me. Let me explain.

You have $100,000 available when you reach the retirement age. I think the age differs based on what you plan to do, but it’s some time after age 62. If you continue to add to your retirement fund for the next 15 years, you are going to have a nice, tidy sum.

Add to that your real estate. You currently have $250,000 in equity, and the chances are overwhelming that in 15 years your house will be worth well over $400,000, creating much more equity through appreciation.

Clearly, this is not a wealth problem, or even a savings problem. This is a liquidity problem. You need to start building up a savings account that can be tapped in case of an emergency. Let’s run some hypothetical numbers.

I’m going to assume that your current mortgage requires payments that amortize over 30 years. With a rate of 6.25 percent, your monthly principal and interest (P&I;) payment is probably about $925.

Refinancing to a 15-year fixed rate would certainly drop the rate, perhaps to 5.25 percent, but the P&I; payment would jump to $1,205.

Here’s the question: Would you be able to continue to make your retirement fund contribution and start a liquid savings account with an increased mortgage payment?

It seems to me that you have a twofold objective.

First, you can certainly refinance to a fixed-term mortgage of either 15 or 30 years at a lower rate than 6.25 percent. That’s a no-brainer.

Second, you need to start saving money that is readily available. This is what I mean about being out of balance. If, for some reason, you need some money, you would either have to pull it from your retirement account with a possibility of a financial penalty, or you would have to either borrow against the account or take out a second mortgage.

Either way, the money is there but not readily available.

Here’s my advice: If you can afford to start a liquid savings account and absorb the increased payment of a 15-year mortgage, go for it. But if you can’t, refinance to a 30-year loan, take the payment difference and invest it in a reliable and liquid mutual fund.

Henry Savage is president of PMC Mortgage in Alexandria. Contact him by e-mail (henrysavage@pmcmortgage.com).

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