“Is there a way to refinance our home, which is well underwater, even though we have never missed a payment, are not in danger of missing a payment, and it’s not a Fannie Mae or Freddie Mac loan?” asks Andi, 44.
The couple also wants to know if they can retire when Jeff, now 51, turns 65.
Jeff and Andi, whose names have changed, have saved $429,000 in a Thrift Savings Account, $8,600 in a 401(k), $167,200 in IRAs, $6,400 in mutual funds, $27,400 in money markets, $3,500 in savings and $5,100 in checking.
The Star-Ledger asked Jody D’Agostini, a certified financial planner with AXA Advisors/ RICH Planning Group in Morristown, to help the couple plan their finances for today, and for the future.
D’Agostini says that there’s good news, and some news that will mean some financial tweaking.
“They both have solid employment and make good incomes,” she says. “Their debt has been edging up, and their payments are taking on more of their income.”
Refinancing their home would certainly help on that end.
Jeff and Andi have a mortgage of $445,000 at 7.75 percent, in the seventh year of a 30-year term.
They also have a home equity loan of $61,000 at a fixed rate of 5.125 percent.
Although rates have recently crept up, they remain historically low.
The couple currently shells out $4,239 in monthly payments, but if they could refinance and consolidate the two loans to a 15-year fixed rate loan, it would reduce their obligation to $3,250 per month, saving them close to $1,000 a month.
D’Agostini says she’d love to see them pursue that option because it mirrors the timeframe for their retirement. When Jeff turns 65, they’d be mortgage-free and have an enhanced cash flow.
Alternatively, she says, they could refinance to a 30-year fixed with a payment of approximately $2,211 per month, saving them over $2,000 per month.
“The obstacle to this is that they purchased the home in late 2006, close to the high of the real estate market, and they have seen their home value fall significantly to a value of around $400,000,” she says. “Their house is therefore ‘underwater’ since they owe more than the home is worth.”
To qualify for a new loan, D’Agostini recommends they start paying extra toward the principal each month so they aggressively pay down the mortgage.
“They will need to get to a point where the home value increases and the principal balance decreases enough so that they have at least 20 percent equity in the home,” she says.
Jeff and Andi had been considering some big home improvements, but
D’Agostini says they should put them on hold.
They may also want to consider a temporary redirection of some of their retirement contributions.
“Perhaps for a short while, some of this should go toward debt reduction for the mortgage, home equity loan and personal loan,” she says.
In looking at the rest of their finances, D’Agostini says it’s good to go back to the basics of financial planning, which all starts with a budget.
She suggests they study their budget and expenses for the past three to six months to see if it meets their objectives in the timeframe they’ve envisioned.
“Good practice would be to make sure you have a balanced family budget each year. This means that you should not spend more than you make,” she says. “Savings should be included as a line item whether it’s for retirement, education, some future purchase or whatever.”
D’Agostini says their retirement goal is in reach.
Andi will have a pension projected to be close to $50,000 annually, which D’Agostini called a great kickstart to a secure retirement.
“The largest obstacle to retirement is longevity, and the more income that you can secure in fixed vehicles such as pensions, Social Security and annuities, in particular to fund fixed expenses in retirement, the better off you will be,” she says.
D’Agostini says Jeff could retire at 65, but Andi should wait one more year until her age is 59 because that’s when her pension can begin.
“When they retire, it is projected that they will be able to cover 126 percent of their expenses, therefore there is room for them to pursue some other outlets at that point,” she says. “However, again, it should stay within their budget.”
The $50,000 per year pension is based solely on Andi’s life. D’Agostini says they should look at a joint and survivor option, which would possibly lower the monthly household pension, but would continue if Andi predeceases Jeff.
They could also explore a permanent life insurance policy on Andi’s life, which would allow them to take the full amount of Andi’s pension, and give a death benefit to Jeff in an amount that would be able to replace the income lost if Andi predeceases him.
D’Agostini said they should also consider disability insurance, which would help with their cash flow should one of them be unable to work.
Long-term care insurance is also worth a look to help cover the cost of care should they need it in their senior years.
“The premiums tend to rise sharply as you get closer to age 60, and the chances of a more challenging health history also rise,” D’Agostini says. “Since the chances of needing long-term care if a couple makes it to age 65 increases to over 75 percent, then it is wise to look to obtain enough coverage to be able to offset some of the costs.”