Mortgage Options
I need to refinance my 30yr. $267K balloon mortgage, with 23 years remaining.
I am looking at three options: 1) 30 yr., 2) 15 yr., and 3) Pay down the mortgage by $86K from savings, and refinance the remainder at 30yr.
The results I get are puzzling. I see very little difference in consumption over my remaining lifetime (on the order of 0.3% difference). Why is that? Furthermore, when I choose option 3) I see a reduction in my Medicare Part B premiums for the first 5 years of retirement totaling about $8K. What is that all about?
RSS
Medicare B premiums are based on your Adjusted Gross Income. If you have some (more) deductions and/or lower income, you're likely to see a somewhat lower medicare B premium, increasing depending on what your AGI looks like over time. Scenario 3 is likely to generate something like that since you will have fewer regular assets to generate taxable income (thus lowering your AGI) and you will likely have a [small] interest deduction going into those years, again lowering your AGI. It's remotely possible that we have a bug here (I was pretty careful when I did the Medicare B implementation and we haven't seen any problems with it when we've been asked to check out specific results) so if you're REALLY puzzled, open a support ticket, upload your database, include detailed instructions on how to recreate the problem, and we'll take a look.
As for the difference in consumption, I can understand that it might not be as big as you think. For starters, any difference in consumption will be spread over your entire lifetime, not just the years of mortgage. Since mortgage payments are made in nominal terms and decrease over time in any event, I would expect the difference in consumption to be small as long as you have to have some kind of mortgage. That changes if you can just pay the thing off. On the other hand, depending on your economy a .3% change could be significant, we just can't tell from here.
Best,
Dick Munroe
Dick, I believe you mis-spoke when you said "a [small] interest deduction going into those years, again lowering your AGI." Mortgage interest deductions do not affect AGI. They are deducted from AGI as Schedule A items to arrive at Taxable Income.
Regards
James Mavrogenis
Yep. This is why I'm not an accountant. I read this stuff, blow it into code, then forget about it.
Leaves room for some modicum of sanity.
Dick