Should I Refinance My Mortgage or Keep Paying?

published 31 August 2011

Editor's note: This is one of the 20 tough financial questions posed in the “Do This or That?” cover story in the September 2011 issue of Kiplinger’s Personal Finance. Use the drop-down menu above to consider other financial conundrums and the right answers for you; share your own experiences and insights in the Discuss field at the bottom of this page.

Pay off the mortgage if you are nearing retirement and would like to be debt-free—and you have enough nonretirement money to pay it off. (Every penny you withdraw from your 401(k) or traditional IRA is taxed at your ordinary income tax rate, plus you may pay a 10% early-withdrawal penalty, depending on your age.)

Dumping the debt also makes sense for conservative investors who don’t think they can earn a higher interest rate on the cash than the rate on their mortgage. Make sure you have sufficient savings left over to handle large future expenses, says Bud Hebeler, retirement-planning expert and creator of www.analyzenow.com.

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Keep your mortgage if you can comfortably handle the payments and you enjoy sizable tax deductions for your mortgage interest—and you don’t need the emotional satisfaction of being mortgage-free. Or do a little of both: Accelerate your mortgage payoff by paying a little extra each month or refinancing with a shorter-term loan. In early July, the average rate on a 15-year fixed-rate mortgage was 3.8%, according to Freddie Mac. If you’re within a few years of retiring your mortgage, closing costs are likely to outweigh the benefits of refinancing. Run the numbers with a refinancing calculator at www.mtgprofessor.com.