Yesterday I received a call from a young lady (We'll call her Gertrude) who asked my opinion on if she should refinance her 15 Year, 5.25% Fixed rate mortgage to receive a lower payment on a 30 Year, 6.25% Fixed Rate Mortgage to give her some breathing room each month.

She and her husband had done everything she could think of to cut back her monthly expenses, but her family still needed about $400 a month for her to start working less hours a week to be able to be home more for her children. They had paid off their cars, credit cards, and the only "luxury" they had was Satellite TV - there was nowhere else to cut - unless they wanted to skip some meals.

I ran the numbers and Gertrude would save around $380 a month by refinancing into a 30 year mortgage and save about $260 a month if they refinanced into a 20 year mortgage. I continued the questions I ask everyone when completing an Application and we got to the Assets information -in fact, she brought it up before I got to it - that there was a substantial amount of money in CD's that were earning about 4.25% or less along with her savings that earn 2% or less in addition to her 401k that she had stopped contributing to since it was tanking. There was more than enough money in her CD's alone to pay off her mortgage and still give her more than a year's cushion should she or her husband be out of work and she even had a separate Savings account for emergencies.

    At this point,  let me stop and tell you about an influence in my life, Dave Ramsey. I had taken Dave Ramsey's Financial Peace University Course a couple of years ago. At the age of 26, through his brokerage firm, Ramsey Investments, Inc., he had built a rental real estate portfolio worth more than $4 million. Ramsey's debt-fueled success soon came to an end as the Tax Reform Act of 1986 began to negatively impact the real estate business. One of Ramsey's largest investors was sold to a larger bank, who began to take a harder look at Ramsey's borrowing habits. The bank demanded he pay $1.2 million worth of short-term notes within 90 days, forcing him to file bankruptcy. Ramsey vowed to never again borrow money - however, he did not sit around in self pity for too long - he asked God to show him how to create wealth His Way without debt and promised to teach everyone he could how to do it.Thru prayer,  searching the Bible, and attending other Christian Finacial Planners workshops - God showed him how to pick himself up and systematically save his emergency fund, payoff his debts and THEN buy investments with cash. He has been sharing his knowledge of God's Wisdom about money on the radio(on over 300 radio stations), in his books, and DVD study courses ever since.

Now Back to Our Story- After Gertrude had informed me of the amount of money she had in CD's and other Savings Accounts, she immediately asked, "Should I pay off my Mortgage with my CD's? My tax preparer said I shouldn't since I would no longer have a tax deduction for Mortgage Interest." I asked her if her Tax Preparer had backed his opnion with any real numbers - as in showing her Comparisons with her Current 2007 1040 vs. an Amended 1040 without the Mortgage Interest Deduction and she said, "No, he just said it wasn't a good idea." 

Immediately, my shoulder angel(played by Dave Ramsey) has beaten up my shoulder devil and is yelling in my brain "TELL HER TO PAY IT OFF! TELL HER TO PAY IT OFF! TELL HER! TELLLLL HERRRRRR!!!!!!"

To quiet my new-found shoulder angel I asked Gertrude to go over some real numbers with me over the phone. I reminded her that I am NOT a Tax preparer so we were going to keep it simple. I asked her if she were to pay off this mortgage how many year's salary would that leave her in Savings? She replied , "Over a year -not counting my Emergency Fund and 401k." Good. Based on the Escrow amount she gave me per year, I calculated that her Principle & Interest amount per month was $988 x 12months = Saving $11, 856 per year if she paid off her mortgage. By using an Amortization schedule for her current loan in it's 3rd year of repayment I calculated she was paying on average about $530 in Interest per month x 12 months = $6,360. Depending on variables that I did not have access to - she would actually get a deduction for a % of the $6,360 -but I used the full amount in my example to her. So I told Gertrude that even if she was getting the full amount deducted from her overall Taxes to be paid after all other deductions She would still save form the totals above $11,856 - 6,360 =$5,496 per year or $458 per month.

I explained to her that more than likely, from what she had told me, we were looking at that deduction being a lot less like maybe $2500, which would actually save her more than $9300 per year or over $775 per month (Some of you tax folks help me out). 

So I advise her to have a MBP (Mortgage Burning Party) and do a happy dance since:

1. She will save at least $458 per month - (what she needed to begin with)
2. She is currently paying out 1% in interest (5.25% on the mortgage) more than she was receiving (4.25% in CD's) - this will correct that imbalance
3. She will have over a year's salary remaining in liquid savings
4. She can now work less hours to spend more time with her kids.

She thanked me for my advice and said she was gonna get some real numbers from her Tax Preparer too (even if he is a grumpy old man) to see exactly how much she would save. I told her that if my bosses were not Christians, and they overheard me telling a Prospective Client to not refinance - but payoff her mortgage instead -I would probably be fired - But I have to be able to sleep at night and know I did the right thing for Gertrude. 

Sleep easy Gertrude - I know I will.