What's best action when mortgage is a burden but payoff is near?

Dear Liz: We have a second home close to a lake that we bought in 2002 for $370,000. It could have sold for $1 million at the peak of the market but is now worth about $800,000.

We owe $100,000 on a mortgage with four years left until it's paid off, but the payments are a hardship and barely manageable. I don't expect prices in the area to improve much in the next several years, and they may decline more.

Since I could sell the house now and get back all the money I ever put into it, I figure that every dollar I pay on it from now on is a dollar of profit burned. Selling the house is not an option, though, as my wife is adamant about keeping it.

We are 10 years from retirement and have a kid to put through college. Our income is just under $100,000, we have no other debts and our primary home is paid off. Should we refinance the remaining balance to a 30-year loan, or just grin and bear it until the payoff in a few more years?

Answer: If you're on track saving for retirement and for your child's college education, then the smart thing would be to gut it out and get the property paid off. You're so close to the end of this loan that the majority of your payments go toward principal. Refinancing might lower your payments, but would dramatically increase the amount of interest you'd pay over time.

If you're stinting your savings, though, the math gets more complicated. You could view the paid-off vacation home as an asset you could tap later for retirement expenses or college. In that case, getting it paid off on the current schedule would make sense. If selling or borrowing against the home in the future isn't an option, though, then lowering your payments so you can save for your other goals starts to make some sense.

If that's the option you choose, consider a 15-year loan rather than a 30-year loan. The shorter loan will still dramatically reduce your payment but you'll pay about 60% less interest over time.

Financial balance may require creativity

Dear Liz: You've written about the 50/30/20 budget structure that people should strive to achieve. As you said, it's a difficult feat. But here's my question: How does one even come close when you live in a major metropolitan area?

In my particular case, home values in my area have remained intact in many places and demand for apartments is so high that vacancy rates are the lowest in the nation. To get into a relatively safe neighborhood with access to public transit, rent is more than $1,000 a month with a roommate or two. Finding that 50/30/20 balance seems impossible for people who live here, and we can't all just relocate.

Answer: If you live in a high-cost area but don't have a high income, you'll need to get creative if you want to keep your "must have" expenses — shelter, food, transportation, child care, minimum loan payments and insurance — under 50% of your after-tax income.

Many people in high-cost areas devote 40% or more of their incomes to shelter costs, which makes it all but impossible to have enough money left over for their "wants" (clothes, vacations, gifts and other non-necessities that should consume 30% of their after-tax incomes savings, according to the 50/30/20 plan) or savings and debt repayment (which should consume 20% of your after-tax income under the plan). The result is a perpetually unbalanced budget, which often leads to more debt and lots of anxiety.

But people have come up with various solutions to better balance their budgets. Blogger Donna Freedman was an apartment manager for several years, which helped lower her shelter costs. Fred Ecks, who retired in his 40s, lived on a boat to reduce his rent in notoriously high-cost San Francisco. Other people have exchanged their services for free or reduced rent by baby-sitting or serving as a companion to an elderly person.

If you can't find a solution that lowers your housing costs, you have two options: Continue to live with a lopsided budget and accept that you may never be able to achieve a balanced financial life, or move to a place where you can make the math work.

Questions for possible inclusion in Liz Weston's column may be sent to 3940 Laurel Canyon, No. 238, Studio City, CA 91604 or via http://www.asklizweston.com. Distributed by No More Red Inc.

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