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Should you refinance before retirement?

Posted by Garick Giroir on July 22, 2020

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As you approach retirement age, it’s natural to wonder how you’ll make ends meet once the sun sets on your career. If you still owe a mortgage on your home, now could be a good time for you to take your retirement plan to the next level with a mortgage refinance.

To refinance a mortgage basically means to pay off your existing home loan with the funds from a new mortgage.

With interest rates at a record low, U.S. homeowners are jumping at the chance to refinance their home loans; A trend that shows no signs of slowing. Mortgage rates fell below 3% for the first time ever this month as the economy continues to struggle from the effects of the coronavirus pandemic.

Why refinance? 

There are many reasons homeowners choose to refinance their mortgage before retirement.

Take advantage of lower interest rates.
The first, and most obvious reason homeowners refinance their mortgage is to secure a lower interest rate. If you can reduce your interest rate by at least 2%, then it’s worth refinancing.

Reducing your interest rate has several advantages. It can help you build more equity in your home sooner, lower your monthly payment and, of course, save you money.

Having more liquid assets is the primary reason many homeowners nearing retirement 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, rainy-day savings, travel or even to finance a move to a retirement community down the line. You can also choose to let that money grow by investing it in the market or adding it to your existing retirement fund.

Shorten the life of your loan.
If you have a mortgage with a really high interest rate, refinancing can help you pay off your loan in nearly half the time.
If you have more than a decade to go until retirement, refinancing a 30-year mortgage into a 10- or 15-year loan can help you to retire completely debt-free. As long as you have your debt under control and enough money coming in each month to pay your bills, refinancing to a shorter term can help you save on interest and pay off your home sooner. Best of all, you’ll be able to retire with peace of mind, having paid off your home while you were still working. 

Convert between adjustable-rate and fixed-rate mortgages.
Fixed-rate mortgages and adjustable-rate mortgages (ARMs) are the two main mortgage types.
Many homeowners opt for ARMs because it offers a lower interest rate in the early years of the loan. Over time, the rate gradually increases. This is not an issue if the homeowner doesn’t think they’ll be living in their house for a long time. But if you’re in it for the long haul, or simply looking to take advantage of today's historically low rates, switching to a fixed-rate mortgage can lower your interest rate and offer you stability instead of future rate increases.

"If you can lock in (these incredibly low rates) with a fixed-rate mortgage, that’s locking in potentially a couple of hundred dollars of savings every month,” said Jeff Tucker, economist at Zillow.

Settle your debts.
If you are carrying significant amounts of debt, refinancing to a lower-interest loan can help you 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.

Turn your home’s equity into a valuable cash asset.
Whether you know it or not, 
your home's equity has been growing over the years thanks to things like renovations and market trends. Refinancing can provide access to some of that equity. If you’ve built enough equity in your home, you can apply for a cash-out refinance — which lets you borrow more than your original mortgage, receiving the difference as cash at closing. You can use the proceeds of your loan for anything from home improvements to new business ventures. Cash-out refinancing generally offers a lower rate than home equity loans, making it a great option to consider as you look toward the future.

Things to consider. 

The first thing you need to know before refinancing is that it’s only worth the cost if you come out ahead. Crunch the numbers carefully and verify that you will indeed gain from a refinance.

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, you’re unlikely to recoup the cost of the refinance.

Next, understand that there are a few ways to refinance, only some of which make sense for a homeowner who is nearing retirement. Avoid refinancing a mortgage to a lengthier loan pre-retirement. Doing so could trigger an increase in your income tax payments and could potentially leave your heirs with a mortgage to pay off after you pass on.

The bottom line. 

Refinancing to a lower-interest loan, one with a shorter life, or a mortgage that offers both can help you sail into your golden years, debt-free. If you’re not sure how to get started, speak with a financial expert who can help guide you toward an option that aligns with your long-term goals.

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