Recently my wife, Colleen, and I modified our mortgage. I’d like to share some of our thinking because it illustrates some of the trade-offs made in personal finance.
But first, a little background. As you would expect from a financial advisor, my wife and I have the basics covered:
Why we made a suboptimal decision
We decided to pay off a portion of our 3.75%, 30-year mortgage and refinance to a 15-year mortgage at 2.75%. The interest we will save is likely less than the return we would have seen had we invested the money instead. So modifying our mortgage was a suboptimal decision from a financial perspective.
Why would I have done this? Am I not a super-rational financial advisor?
Yes, but our family has several values that led us to our decision:
I like to think of it this way:
The money doesn’t drive your plan — the plan drives your money. Financial analysis and planning can provide structure for your life, but don’t drive the meaning or make your goals. You do.
Here’s an abbreviated list of our pros and cons of the mortgage modification we chose:
This also highlights the importance of running the numbers. You have to do the analysis (or have someone do it for you). We spent lots of time reviewing the options and calculating the impact. We thought about it, and talked about it, for weeks before finalizing a decision.
The financial analysis didn’t make the decision, but it did provide the structure and information to help us. Ultimately, our personal values trumped the math, but we still did the math first.
This is not an analysis of whether you should modify your mortgage, rather an illustration of how to think about tackling financial issues.
STEPS WE TOOK TO MAKE OUR DECISION
Author's note: After publication of this article interest rates spiked subsequent to the presidential election. As a result, we have not refinanced to a 15 year loan since we did not lock in a competitive rate. However, we will still be paying down our mortgage. It just shows that flexibility in your planning is key.
For more on this topic see Fun with Mortgage Math.
This article was originally published on Nerdwallet.com.
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