Should You Refinance Close to Retirement?

Should You Refinance Close to Retirement?

Low-interest rates make refinancing attractive to many homeowners. It can help you lower monthly payments, and that savings can help provide a financial cushion or can be spent towards having some more fun in life. However, if you are approaching your retirement, you may have a few additional considerations to keep in mind.

Why Refinance?

Refinancing helps homeowners at all life stages and income levels the opportunity to pay less for their homes each month. This is especially true for homeowners who purchased their homes at times when the going interest rates were considerably higher.

In fact, shaving as little as one percent off of the current interest rate can net substantial savings over the remainder of the loan. There are also a few other reasons you might want to consider refinancing your home.

The rate on your Adjustable Rate Mortgage (ARM) is about to increase – or you suspect that it might. If you can convert your ARM to a fixed-rate loan with a lower interest rate, you have a potentially winning situation on your hand – provided that you are at least ten years away from retirement.

Other than just saving money, another reason to consider refinancing your home is to take advantage of a lower rate to pay your mortgage off faster. If the new interest rate is lower than your current rate, you can make roughly the same monthly payment and shave years off the life of your mortgage. Combine that with additional efforts to make one or two extra payments each year and you can potentially shave even more years from your loan, effectively reducing the amount of interest you pay over the loan term even further.

Disadvantages of Refinancing

With the potential benefits that refinancing has to offer, many people wonder why it would not be an automatic yes. There are a few situations when refinancing may not be the best decision for your circumstances.

If you are planning to move within the next five years, refinancing might prove unprofitable. For individuals who are having trouble making ends meet, or reaching financial goals prior to retirement, refinancing a home as retirement approaches could prove to be a financial burden rather than a boon. The absence of a mortgage during retirement is one of the best gifts you can give yourself. Consider carefully before extending the burden of making monthly payments into your retirement years.

The final disadvantage to consider is the loss of equity in the home. Having equity in your home gives you options when emergencies in life arise. These emergencies can come in the form of health issues, family financial issues, or the expense that comes from needing a new roof or furnace. An extended mortgage could have you cash strapped and unable to come up with the funds for these types of emergencies.

Good Rules of Thumb

The best rule of thumb when deciding whether or not to refinance is to do the math. If you can recover your closing expenses and turn payments savings into investments during the time you have remaining before retirement, then refinancing may be financially prudent.

On the other, if you could invest the amount of money you will spend on closing costs and other expenses related to refinancing your home and make a bigger impact on your future by doing so, then your money is best spent elsewhere.

Finally, it ultimately boils down to the needs and wants of the individual. Everyone has a different comfort level regarding personal finances. What are your financial goals for retirement? If not having a mortgage is one, that is the only thing you need to know about refinancing as your retirement approaches. It is always best to consult a trusted advisor to help you walk through any important financial decisions.

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