Should You Refinance Close to Retirement?

Low-interest rates make refinancing attractive to many homeowners. It can help you lower monthly payments, and you can use the extra money for many things. 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.

Another reason to consider refinancing your home is if your lower interest rate is low enough that 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, 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, though, when refinancing may not be the best choice for your situation.

If you are planning to move after retirement or in the next five or so years, refinancing might prove unprofitable in the long run. 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 very well be worth your while.

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, there is one question to ask yourself. Do you want to have a mortgage going into retirement? For some, that is the only thing you need to know about refinancing as your retirement approaches.