This week I received an email from a reader regarding his mortgage, and I’d like to share it with you. Please keep the letters and emails coming, by the way! I enjoy using your questions, not only for this column, but also for my PlanStrongerTV™ show. I’ll always modify the submission slightly and change the person’s name to protect his/her anonymity . . . so here is “Hank’s” question:
I am an avid reader and fan of your column. Your advice is always useful, easy to understand, and concise. Thank you and keep up the good work!I am a single man in my mid 50s with a small business. My income fluctuates from year to year, and I am careful about my spending so that I can afford to contribute as much as possible to my IRA and also keep an emergency cash fund.
My question is this: I am 3 1/2 years into a home loan with a 30-year fixed mortgage at 3.75%. My mortgage payments are affordable and I always pay an additional 10-20% a year toward the principal, as my income allows. All of a sudden, however, it seems I have been getting heavily marketed to by financial institutions (including my mortgage holder) wanting me to refinance my home loan. Is there some coincidence to this timing (ie: after three years, are the bank’s profits from my loan not where they'd like them to be? Perhaps they are not pleased with my additional principal payments?). I am also curious if a refinance would be of any benefit to me. I don't need extra cash to finance anything, and my priority is saving for my retirement. I am not inclined to extend the duration of my home loan, unless it is a good financial move.
I would appreciate your insight and expertise.
Thank you for your kind words, Hank. Here are my thoughts on your question:
1. There's no real correlation between refinance solicitations and the number of years you have had your current mortgage. More likely, you’ve become a “marketing target” because of the equity you have built up in your home by making extra payments.
2. You've locked in a great, long-term fixed rate. Good for you!!! There is absolutely no reason for you to refinance, based on the information you provided. Moreover, the rates are at least 1% higher today! I’d simply ignore the offers and relegate them to your shred bin.
3. If you'd like to have some flexibility and a "back up" emergency source of funds, you could consider a HELOC (Home Equity Line of Credit); these are tied to the Prime Rate. That being said, if you don't think you'll need the line of credit, then don't bother.
4. The extra payments you’re making on your mortgage are great and will significantly accelerate your pay-off date! You are on the right track! Just make sure you continue to contribute to your emergency fund for unexpected home repairs or if there’s a lull in your business.
Thanks for writing!