What to consider when mulling over mortgage options

Q: I just bought a home using two loans; a 30-year mortgage fixed for five years at 5.25 percent and a second, 15-year mortgage fixed at 8.75 percent with a balloon payment of $29,000 in 15 years. I plan to refinance at least the second mortgage to get rid of the balloon payment, but I'm overwhelmed by the choices. Any thoughts on how to time this to get the best deal? How can I learn more about mortgages?
W.M., Los Angeles

A: Susan Shute, a mortgage specialist at Bryn Mawr Trust Co., Bryn Mawr, Pa., teamed with Dodie Theune, a certified financial planner there, to handle your question.

Assuming that the loan does not exceed the home's value, they recommend refinancing the two loans into one mortgage at today's rate of 4.25 percent fixed for five years, or a 30-year fixed rate loan at 6 percent depending on how long you plan to live in the home.

Rates, of course, are subject to change at any time. Closing costs such as title insurance and appraisal fees can be added to the loan balance or paid by you at settlement. A loan officer can determine these costs and tell you how long it will take to recoup them as a result of the savings from your reduced monthly payment.

The best way to understand your options, in their opinion, is to consult with an experienced loan officer from a reputable lending institution. You also might call a local junior college or some lenders that offer courses on home buying and financing.

Q: Are the tax ramifications the same if I remove money from my IRA or cash in a life-insurance policy? I'm over 65 and retired.
G.P., via e-mail

A: It depends. First, if you take money out of your IRA after you turn age 59-1/2, you'll owe ordinary income-tax rates on the withdrawal. Very simple.

But with a life-insurance policy, things can get interesting, says Brian Jones, a certified financial planner in Fairfax, Va. He wants to know if you are borrowing against the cash value of the policy or canceling it outright and

taking its cash value.

If you have a whole-life policy and there is cash value that you choose to borrow against, this is not a taxable withdrawal, but a loan.

But be careful. If you were to cancel a policy with an outstanding loan against the cash value, the loan could become a taxable distribution, subject to ordinary income-tax rates.

Mr. Jones says that if you were to cancel a whole-life policy outright and take the cash value, the difference in what you paid into the policy in terms of premiums - your cost basis - minus any gains in the cash value is taxable to you in the year of distribution. Just like an IRA, this gain is taxed at ordinary income-tax rates.

Either way, consult with a tax adviser before executing this strategy.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.