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My Two Cents

Should You Refinance?

When it comes to refinancing a mortgage, timing is key

Dear Liz:

My husband and I might refinance our mortgage to a shorter loan so we can pay off our house by the time we retire. The steeper monthly payments, however, are daunting. How do we decide?

Liz Pulliam Weston

Financial expert Liz Weston. — Photo by Art Streiber

Being debt-free in retirement is a worthy goal, and low mortgage rates make refinancing all the more tempting. But don't opt for a shorter mortgage if the higher monthly payments significantly reduce your contributions to your 401(k) or other retirement accounts.

House built of coins and banknotes

House built of coins and banknotes, close-up — Ian McKinnell/Getty Images

Remember, your retirement contributions typically score you a tax break (and matching funds, if your company offers them). Your money can also grow tax-deferred. These big benefits typically swamp the relatively low-interest savings you would get from paying off a mortgage.

You should also say no to a shorter mortgage if you're carrying any higher-interest debt, such as credit-card bills, auto loans, or education loans. These debts typically aren't tax-deductible — another reason they should be paid off before you tackle a mortgage.

Carrying Costs

More and more Americans are still paying a mortgage as they start their retirement years. And according to the latest Federal Reserve statistics, the amount of home-secured debt owed by people ages 65 through 74 also grew between 2004 and 2007, to a median amount of approximately $69,000.

Liz Weston, author of Your Credit Score: Your Money and What's at Stake, blogs at asklizweston.com.

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