I have a question regarding your position on refinancing. I heard a loan officer at my company say to clients that they shouldn't refinance to shorten the term of a home loan. His position is that they should refinance to free up cash, and use the extra money to fund their 401K accounts. What do you think about this?
–Ken from Tennessee
That is a good question. Let me first start by saying that you can never make a blanket statement about any situation. That is why I don’t like training that focuses on one strategy. As good as the strategy might be, it is never one-size-fits-all. That being said, here are a few points:
- I agree if someone has equity in their home and an underfunded retirement plan, there is an opportunity for them to take advantage of an important tax benefit and put themselves in a better situation in the future. It is even more important if there is an “employer matching program.”
- On the other hand, what if they have little equity? A refinance to use the savings in order to shorten the term of the loan and build up equity may make all the sense in the world.
- In addition, what if the person is approaching retirement and/or doesn’t need the tax deduction of a 401K? In these cases, shortening the term may make more sense, if they can afford to do so within their retirement budget.
- Finally, there is the situation in which the 401K plan is already being funded through their salary. Therefore, the cash is not needed for this purpose. In this case, the question is—should they refinance and build up equity more quickly? Again, I would have to know more about their financial situation, but certainly this is a plausible strategy. On the other hand, if they have consumer debt, they may want to take care of that first -- so they can pay off the home loan even more quickly in a systematic debt roll-down strategy.
Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at [email protected].
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