15 Year Mortgage: Record Low Can Help Retirement Strategy

Last Updated Jun 1, 2010 11:46 PM EDT

This might qualify as an old-fashioned and quaint notion after reading the New York Times' report of homeowners' punking out on mortgage payments with impunity. But if like me, you're still committed to paying off your debt, a record-low rate on the 15-year mortgage presents an interesting opportunity to rethink your retirement planning strategy.

Last week the 15-year dipped to 4.2 percent, the lowest it's been since Freddie Mac started tracking it back in 1991. For what it's worth, the payment on a 15-year loan today is what you would have paid for a conforming 30-year mortgage a decade ago when the 30-year FRM was at 8.52 percent. That's how cheap this is in historical terms. And it's a bit of a surprise too. It was just three months ago we were discussing how the Fed's planned retreat from the mortgage backed security market would send rates higher, not lower. But that was before Europe's debt crisis moved front and center, setting off a rally in the U.S. bond market that has pushed down Treasury yields and thus mortgage rates.

Okay, so the 15-year is a ridiculously great deal. What's that got to do with your retirement? Well, as Jane Bryant Quinn pointed out in her recent post,, according to one credit counseling firm, housing costs are the #2 reason older folks are running into financial trouble these days. As Jane reminds us, paying off your mortgage before you retire is one of the surer ways to give yourself a shot at a stress free retirement.

And assuming you have the equity and income to refinance, choosing a 15 year will speed up your payback and save you tens of thousands in interest costs in the process.

A recent Wall Street Journal article cited a Credit Suisse report that more than half of borrowers with 30-year conforming fixed rate mortgages are paying rates of at least 5.75 percent. On a $350,000 mortgage that works out to $2,042 a month. Refinancing the same $350,000 loan into a 15-year will run you about $2,624. Granted, that's a steep $600 or so more a month. But in return, if you're in your 50s and just a few years into paying off a 30-year mortgage, this move gets you mortgage-free before you retire. Might that be worth trying to find an extra $150 or so a week to put toward the mortgage? Or if that's not feasible, I'm going to risk retirement-planning blasphemy and float the idea of scaling back your 401(k) contributions to free up more money for the mortgage. Yes, you'll have less saved in your 401(k) come retirement. But you'll also have much lower housing costs in retirement, right? That's not to suggest you stop contributing to the 401(k) altogether. Come on, you still are going to need plenty of liquid assets to tap in retirement. This is about reducing the contribution rate so you can knock off one of your biggest (if not the biggest) retirement costs: the mortgage.

Of course, you can skip the refinancing step and just commit to making extra payments on your 30-year. But perhaps the rigidity of committing to the 15-year is needed to get you to stick to an aggressive repayment plan. Good intentions tend to get pushed aside. The 15-year could be just the push you need to wipe out one of your biggest financial stress-points before you retire.

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