Should I Refinance Before I Retire?

Q: I’m in my mid-50s and I’m preparing to retire sometime down the line. I’m wondering if I should refinance my mortgage as part of my retirement planning. Is that a good idea?

A: Refinancing your existing mortgage can have a large impact on your financial health, for better or for worse. Be sure to consider all angles before deciding if a pre-retirement refinance is right for you.

The first thing you need to know before taking this step is that refinancing doesn’t come cheap. It’s only worth the cost if you come out ahead. Crunch the numbers carefully before making this decision.

The second factor to consider is how long you plan on staying in your home. Financial experts only recommend a refinance for homeowners who plan to continue living in their home for at least 10 years. Otherwise, it is unlikely that they’ll recoup the cost of the refinance.

Another important issue to weigh is the significant tax savings that many homeowners believe a mortgage affords them. While this may be true under certain circumstances, it is rarely the case for those who are nearing retirement.

Homeowners are offered tax deductions on the interest of their mortgage payments. However, toward the end of a mortgage’s life, most of the monthly payment is going toward the principal of the loan and not toward interest. This means the tax savings from an older mortgage are minimal.

If you are holding onto a mortgage for this reason, consider a refinance that will lower those small interest payments and help you be rid of your house debt before you’re ready to retire.

Next, understand that there are a few ways to refinance, only some of which make sense for a homeowner who is nearing retirement.

Here are the three primary ways to refinance a mortgage:

• Lengthening an existing loan into a new 30-year mortgage

• Refinancing to a loan with a lower interest rate

• Shortening the life of a loan to a new 10- or 15-year mortgage.

While the second two courses of action will afford you several long-term benefits, it is rarely a good idea to refinance a mortgage to a lengthier loan pre-retirement. Doing so has several disadvantages:

• You may end up leaving your heirs with a mortgage to pay off after you pass on.

• You will retire with debt. This can increase your stress levels and put a severe strain on your financial independence during your retirement.

• You can trigger tax complications. With more fixed expenses to cover pre-retirement, you may be forced to pull money out of your retirement accounts. This can cause an increase in your income tax payments.

On the other hand, refinancing to a lower-interest loan, one with a shorter life, or a mortgage that offers both advantages together, can offer you several significant benefits upon retirement.

Here are just a few of the reasons you may want to consider this kind of refinance before you retire:

1. Extra cash flow – Having more liquid assets is the primary reason many pre-retirement homeowners choose to refinance. By switching to a loan with a lower interest rate, you’ll find yourself with considerable monthly savings that can help you live out the rest of your years in financial independence.  Use that money for basic living expenses, to fund your travels as you explore the world or even to finance a move to a retirement community. You can also choose to let that money grow by investing it in the market or adding it to your existing retirement fund.

However you decide to use the money you’ll save on a lower-interest mortgage, you’ll come out ahead.

2. Retire debt-free – If you have more than a decade to go until retirement, refinancing a 30-year mortgage into a 10- or 15-year loan can allow you to retire completely debt-free. As long as you can afford the higher monthly principal for the short amount of time left to pay off your loan, you’ll save on interest. Best of all, you’ll be able to retire with peace of mind, knowing that you don’t owe a penny.

3. Pay off other high-interest debts – Some pre-retirement homeowners are carrying significant amounts of credit card or other debt. In that case, refinancing to a lower-interest loan can be an easy way to come up with extra cash to pay off a high-interest balance.  Don’t let those credit card bills continue to haunt you throughout your golden years!

Refinancing your mortgage before you retire, can help you sail into your golden years, debt-free. Call, click or stop by US Community Credit Union today to ask about your refinancing options. We’re committed to helping you achieve and maintain financial wellness through every stage of life.