James P. Dowd, CFA

Letitia - What a great question. The answer depends upon two distinct but related factors: (1) 15 year mortgage rates are typically less than 30 year mortgage rates, due to the faster amortization schedule and the fact that the interest rate yield curve is generally upwardly sloping (longer term financing rates are usually higher than shorter term rates); and (2) You mention that you purchased your home 5 years ago, but did not say whether you had refinanced in the meantime. You probably know that long-term mortgage rates have plummeted since you purchased your home, so unless your loan is floating or you refinanced sometime during the past year, any new loan is likely to offer a lower rate than what you currently have.

So how should you think about this question? First, compare the annual percentage rate (APR) on the 15 year rate vs. your current loan. If it is the same or higher, you should keep your existing loan. If you have excess cash flow, consider making a principal reduction payment to reduce the amount of the loan. Your payments may not change, but you should be able to reduce the total interest owed to the lender. If the 15 year rate is lower than the rate on your current loan, it may make sense to refinance if the rate differential justifies the time and hassle. My personal rule of thumb is that the rate improvement should be at least .50% before refinancing makes sense. Other people might have higher or lower thresholds; it's really a personal decision. One important point: make sure your rate is fully-loaded, meaning that it should include closing costs, appraisal fees, origination charges, or other expenses that would affect your loan proceeds or your periodic payment schedule. Sometimes these fees and expenses are broken out from the loan interest rate, which can be deceptive. Ask your broker or lender to calculate an all-in rate, including all fees and charges. Or check with a financial advisor if you don't think you are getting a clear explanation.

Another issue to consider, even if the rate is substantially lower with a 15 year loan: do you have sufficient cash flow to cover the monthly payment if your income is adversely impacted? What would happen if you or your spouse became unemployed for a period of time, or became ill, or had to take a lower paying job for some reason? Remember that the cost of financing is not the only factor you should consider; cashflow may also be important. There may be an easy way to provide for this contingency. For example, you might be able to secure a home equity line of credit (HELOC) to provide an emergency buffer. Or you might already have an emergency reserve. Just keep in mind that if you shorten the duration of your mortgage and accelerate the amortization schedule, you will be cutting into your cashflow margin of safety.

I hope this helps you think about your decision. Best regards.

You should contact your lender to learn how they treat additional payments of principal. Some lenders will immediately credit your principal balance, thereby reducing your future interest obligation. I have seen other lenders apply such payments towards the next regular monthly principal and interest payment amount, which does nothing to reduce your interest obligation and in fact increases your cost, since the bank has the use of your money for an extra month.

If your bank takes this approach, then a bi-weekly schedule might be better for you --- faster amortization, less interest owed --- if you can handle the timing. Another approach is to contact the bank prior to making a partial principal repayment, to ensure that your account is credited appropriately. Do not forget to continually re-evaluate your loan terms; as you reduce your balance you may become eligible for more attractive financing than you currently have. Good luck!

Kay - I am very sorry that you are going through this.

Where you live, your total assets, and how your assets have grown during your marriage are all factors that are likely to affect your negotiating position. The fact that you have additional beneficiaries on your 401k is not not likely to make any difference. Retirement assets are not ring-fenced in a divorce proceeding like they are in a bankruptcy.

You should start by speaking to a divorce attorney and consider bringing in a financial advisor to provide advice and counsel about asset valuations. What I mean by that is, a nominal dollar in a 401k plan is worth less than a dollar in a bank account because of the deferred tax liability in a pre-tax account. At the same time, the issue is not as simple as multiplying the 401k balance by 1 minus the tax rate to obtain an after-tax value, because there is an embedded value in maintaining tax deferred status for as long as possible.

A financial advisor, working alongside your legal advocate, can help ensure that you are treated fairly during the settlement process, and may be able to improve the terms of your settlement through his or her understanding of asset valuation, investment taxes, liquidity, and the time value of money. Good luck to you and please feel free to post back with any additional questions.