Which mortgage is best for you? Consider your retirement and savings accounts.

On my recent post, Comparing 15 and 20 Year Fixed Rates, a reader asks how do I decide which program is best for my clients?  The short answer is: I don’t. The decision of what type of mortgage to select is up to my client (assuming they qualify for the shorter term mortgage with the higher payment, of course). I feel it is my duty to help my clients understand the mortgage programs, so they can make an educated decision and to provide them with various scenarios to consider.

I review hundreds of loan applications a year and the biggest concern that I have is that a majority do not have enough funds saved up for retirement or are lacking an emergency savings fund or have not started saving for college for their little ones. I cannot tell my client they have to opt for a 20 or 30 year fixed rate mortgage because they’re shy on savings. If they qualify for a 10 or 15 year payment, that choice is theirs. However I might suggest they consider reviewing their entire financial picture and the possibility of opting for a longer term mortgage to use the difference in payment to fund their savings.

For example, the difference between the 15 and 20 year payment that I referenced in the post, is roughly $400 a month. If you are willing and able to make that 15 year mortgage payment, why not consider opting for the 20 year and apply that $400 towards funding your retirement?  Remember, I’m not a financial planner – I originate mortgages for homes located in the beautiful state of Washington.  You can pay down or pay off your mortgage anytime – but we only have so much time to earn income and stash away funds for our golden years.

My personal suggestion for when people are deciding between different fixed mortgage terms is to consider the following:

1. Do you have an emergency savings fund of at least 6 months of living expenses established? We all know from this economy that many are unemployed (or under-employed) and health issues can strike anybody.
2. Are you on track to fund your retirement? I know I sound like a broken record here, BUT this point is critical. In my opinion, this is the most important event that should be saved for. I am not planning on being able to live off of my social security and I’m not even sure that it will be exist by the time I’m able to retire.
3. Are you saving for your children’s college education? I’m thankful that I saved a little here and there for my son who is now in college. I wish I would have saved more…I’ll write more on this later.  I recommend saving for your retirement first and college second for the same reasons as considering for a longer term mortgage and because of how financial aid is determined. With that said, I think if you start doing an auto-payment for college, even if it’s small, you’re going to feel a lot better when your little one is graduating from high school and you CAN help out a bit (if you have saved for retirement).
4. Do you have other debts? If you have credit card or other debts that do not receive a tax benefit (like mortgage interest) – please consider paying those off first.

Please don’t misunderstand me, I think shorter term mortgages are great – especially considering how low mortgage rates are. I am merely suggesting that you consider your whole financial enchilada (it’s Cinco de Mayo today!) before making YOUR decision. You can always pay down or pay off your mortgage once your retirement and savings are in order.

One way to help boost your savings is to take advantage of today’s low mortgage rates. There are many programs available for refinancing primary and vacation homes as well as investment properties. FHA streamlined refinances do not require an appraisal and HARP 2 (for conventional mortgages securitized by Fannie Mae or Freddie Mac prior to June 1, 2009) may not require an appraisal either. You may be able to reduce your rate and shorten or keep close to your same mortgage term.

I am happy to review your mortgage to see if refinancing makes sense for your home located anywhere in Washington. Click here if you would like me to provide you with a mortgage rate quote.