Ask Bankrate: Should I pay down my mortgage or extend the loan term?

Ask Bankrate is a recurring feature where Bankrate’s experts answer your financial questions. Visit this page for more information on how to submit your question. Click on a question here to jump straight to it.

Questions:

• Close to retirement. Pay down mortgage or extend the term?
• When will the second drop in W-shaped recovery happen?
• How often can I switch online savings accounts?
• How does SIPC insurance work?
• I have a jumbo mortgage. How can I take advantage of low rates?
• Approaching 70. Pay off mortgage with my retirement funds?

Q1: Close to retirement. Pay down mortgage or extend the term?

If I am close to retirement, am I better off paying down my mortgage faster or lowering my payment by extending the term?

— Scott B.

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “What does your retirement savings look like? Rather than pouring more money into the mortgage, consider fully maximizing your tax-advantaged retirement savings options — an IRA, 401(k) or other employer-sponsored plan — and don’t forget the higher annual contribution limits for those age 50 and up; that’s $7,000 max on IRA and $26,000 on 401(k). Money in these accounts will grow without the headwind of taxes, and in a Roth account can be withdrawn tax-free in retirement. Roth IRAs have no required minimum distributions. Consider fully utilizing those tax-advantaged options first and diversifying between pretax (traditional) and Roth to give yourself added flexibility in retirement.

If you’re already doing that, great. Now let’s look at the mortgage situation. How far into the loan you are (or how close you are to the end) will determine whether refinancing into a lower rate and/or different term make sense versus just trying to pay it off sooner. If you have seven years left, for example, then refinancing probably won’t save you much especially if you’re able to accelerate payments (after maxing out your retirement accounts) and get it paid off in three or four years, for example.

On the other hand, if you have 22 years left, then refinancing at today’s record low rates makes a lot of sense. Unless your current monthly payment is really straining your budget, I wouldn’t advocate stretching the term back out to 30 years, but you could still trim your interest rate (and perhaps even your payments) by refinancing into a shorter 20-year or possibly a 15-year term. This will generate significant interest savings over the term and get you mortgage-free a bit earlier in your retirement.”

Q2: When will the second drop in W-shaped recovery happen?

When is the second drop in the W recovery likely to occur? If the government decides to do a second round of stimulus, would that delay it?

— Jennifer

Answered by Sarah Foster, U.S. economy reporter: “Predicting a recession is a lot like predicting the weather. You have data and insights to back up your claims, but sometimes, the world has other plans. We don’t know how long this coronavirus pandemic-induced recession will last, nor when it will end.

Economists, too, have names for recessions, similar to how weather forecasters describe different storms. A “W”-shaped recession is a double-dipping downturn, with the financial system bouncing back but falling again. A “U” form means lower-for-longer, while a “V” means a sharp decline but an equally strong snapback.

Given the sharper-than-expected rebound, followed by a resurgence of coronavirus cases, many economists have wondered whether the coronavirus crisis will be W-shaped.

But there’s an important caveat here: A W-shaped downturn implies that activity returned to its pre-pandemic levels, dipped again, then rose back to that point. Even with the economy rebounding, it hasn’t returned to its pre-pandemic level. Employers shed more than 22 million jobs, and even in those surprisingly strong employment reports for May and June, firms have only recovered about a third of the positions that they cut. Even so, applications for unemployment insurance have ticked up recently, showing that layoffs are occurring before we could even reach that peak.

It might mean that the double-dipping recession will be square-root shaped, or even Nike-swoosh shaped, rather than literally taking the form of a W.

That probably raises the most important takeaway: No matter what shape this downturn takes, the financial pain is far from over. Of course, a key driver on how that path plays out will be fiscal stimulus, and lawmakers are already scrambling on Capitol Hill to enact another round of coronavirus relief. But even then, that’s meant to soften the blow, not necessarily to get us out of the storm.”

Q3: How often can I switch online savings accounts?

How often can I change my online savings account to get a better interest rate?

— Wendy D.

Answered by Matthew Goldberg, consumer banking reporter: “Some banks allow you to close a savings account whenever you want. Other banks may charge a fee for closing your account too soon.

Find out your bank’s account closing policy before opening or closing an account. Compare savings annual percentage yields (APYs), especially after a bank lowers your rate.

But theoretically, you could change as often as you’d like, but it probably isn’t worth the hassle to chase an extra 10 basis points of yield. Instead, ensure you’re earning a competitive yield, even if it isn’t the absolute highest. The top-yielding savings accounts are paying between 0.9 and 1 percent APY. Let’s say your current savings account is paying 0.8 percent APY. Sure, it’s not the highest yield, but is that worth switching banks, when the bank paying the slightly higher APY may just drop their rate, since savings rates are variable, after you open the account? Probably not. If you’re keeping your savings at a bank paying you 0.1 percent, however, you’d definitely benefit from switching. One percent won’t make you rich, but it’s 10 times better than 0.1 percent.

Also, a bank account bonus could be a worthwhile reason to open a new account. Make sure you understand any rules or requirements to be eligible for the offer.”

Q4: How does SIPC insurance work?

Regarding SPIC insurance at a brokerage house: My agent says they are a big company and they have their own insurance, so I can keep over SPIC limits without opening a second account with another broker. Is this right?

— Jennifer

Answered by Stephen Kates, CFP: “SIPC insurance is meant to provide a backstop against the loss of client funds in the event of a brokerage custodian failure. SIPC covers up to $500,000 in securities including $250,000 in cash within a single account registration.

In your scenario, if you have assets spread over multiple registration types (individual, joint, IRA, etc.) you would have SIPC protection up to the limit on each one. If you are bumping up against the limit on a single account, your priority should be to protect yourself. You should ask your broker for more information on their insurance for your consideration. But in the end, if you have any concern about the risk to your assets, you should take the necessary steps to protect your assets. While the risk of a large brokerage failure is minuscule, if it helps you sleep better, don’t hesitate to take precautions.

For more information on SIPC and the full list of account registration types, visit SIPC.org.”

Q5: I have a jumbo mortgage. How can I take advantage of low rates?

I have an ARM that is set to adjust in April 2022. I have recently heard from several lenders that jumbo mortgages are currently not available either for a new home purchase or a refinancing. What can homeowners with an existing jumbo mortgage do to take advantage of the current low interest rates?

— Fred

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “Indeed, a number of jumbo lenders have stopped accepting applications for those products for now and even among those that still are, the landscape is a bit different.

The jumbo 30-year fixed is much harder to come by, while another jumbo ARM like the one you have is more prevalent among lenders doing jumbo loans. But even then, jumbo mortgage rates haven’t fallen to the record low levels that we see on smaller conforming loans so there may not be the refinancing advantage there that exists outside the jumbo space.

If your loan size is close to the conforming loan limit threshold ($510,400 in most markets and $765,600 in designated high-cost markets) and you have the spare cash to pay down the balance below that level, you could then refinance at the conforming rate. Many lenders charge half a percentage point or more on a jumbo relative to what is available on the conforming loan.”

Q6: Approaching 70. Pay off mortgage with my retirement funds?

For those approaching age 70 and retiring in next couple years, is it better to take 10-15% of IRA funds to pay down the mortgage and refi to lock in lower rates and lower payments or better to just maintain a higher mortgage?

— John J.

Answered by Greg McBride, CFA, Bankrate chief financial analyst: “Especially at today’s record-low rates, I’d refinance your existing balance and leave the IRA alone so it can continue growing on a tax-advantaged basis.

Taking that money out of the IRA now will be subject to taxes, so in order to get $1 to put against the mortgage you might need to withdraw anywhere from $1.11 to $1.59 depending on your marginal federal income tax bracket. Since you’re still working, the withdrawal itself may push you into a higher tax bracket.”