Interest rates just went down and you know you can secure a lower rate than what you pay on your mortgage now. The temptation to refinance is great, but is it worth it if you are going to retire soon? Unfortunately, there is no cut and dry answer as everyone has different reasons for refinancing, but being close to retirement does bring with it a unique set of circumstances. In most cases, it doesn’t pay to refinance if you are close to retirement. However, there are exceptions to the rule.
Look at the Big Picture
The first thing to realize is you need to look at the big picture. If you focus strictly on the interest rate, you will feel like you overpay for your mortgage. However, refinancing comes at a cost. Unless you can find a free refinance (which is not possible), you have to consider how much you pay to get that lower interest rate. For example, let’s say you can refinance your current 6% rate down to a 4.5% rate. This is a great savings. But, in order to get a new loan, it will cost you $6,000. Suddenly, those interest savings dwindle. You will not realize the savings until you pay off those closing costs. If you save $200 per month, it would take you 30 months before you realize the true savings of lowering your interest rate.
Looking at the big picture, it might not make sense to refinance to secure the lower interest rate. Sure, your monthly payments would decrease, but overall, you still spend more. If you plan to retire within the next 3 years, you just wasted some of your retirement money.
Another thing to consider is the term. Refinancing resets your loan back where you started. For example, if you have a 30-year term now and you paid on it for 10 years, you only have 20 years left. If you were to refinance into another 30-year term, you add those 10 years back onto the loan. If you are near retirement, this might not be the right choice for you.
Equity in a Home is Important
Some retirees think it makes sense to take cash out of the equity of their home. They figure they have it sitting there, why not enjoy it while they are alive? Unfortunately, this gets a lot of seniors in trouble. Because you have no way to predict the future, you don’t know what you will need down the road. What if you face serious health issues that require long-term care? If you cannot afford the care, it could put you in financial trouble. With the equity in your home still, you may tap into it at that point and have the money you need to pay your medical bills.
Making the Most of Refinancing When You are Going to Retire
If you do not have a way around refinancing when you are going to retire because you are strapped for cash, here are some tips to make the most of it.
- Refinance into a term that is as close to what you have left on your term now. Even if you originally had a 30-year term, but you are already 10 years into it, refinance into a 20-year term. This way you don’t extend the length of time it takes to pay the loan off, but you get the savings you need.
- Negotiate the closing costs to get them as low as possible. Many people do not realize that they can negotiate closing costs. Lenders are often willing to lower them or even pay them altogether in exchange for a slightly higher interest rate. If you can lower the amount you must pay, you make the refinance worth it much faster than if you paid higher closing costs.
- Only refinance if you need the savings or to tap into the equity in an emergency. Refinancing just makes your mortgage more expensive in the long run. You might think the lower monthly payments are a blessing, when in reality, the refinance costs you more.
An Alternative to Refinancing
If your main goal in refinancing is to pay your loan off faster by securing a shorter term, you have another option. Rather than paying a bank to refinance your loan, just make larger payments on a monthly basis. The more you pay towards the principal of your loan, the faster you pay it down. This means you pay less interest over the life of the loan. Most lenders do not regulate how much you pay on a monthly basis. If you want to pay extra towards the principal, you mark it on your payment coupon so the lender can apply the money where it should go. This way you can decrease your term without officially refinancing into a lower term. Even just one extra mortgage payment per year can knock several years off the term of your loan – every dollar counts!
If you are going to retire soon, you really need to consider everything before you refinance. Your retirement is a time where you should enjoy yourself and not have to worry about your finances. If you take on a new mortgage just a few years before you retire, it puts an extra burden on you. Unless you can lower your interest rate by more than 1% and you know you will stay in the home for at least 5 years, it is best to stick with the mortgage you have. Try to think outside of the box and figure out ways to pay the mortgage down faster. This way you can enter your golden years without the burden of an expensive mortgage on your back.
If you must refinance, make sure you shop around for the best deal. Every lender offers different rates and closing costs. Try to find the option that is most affordable for you and will help you pay off the closing costs faster so that you can enjoy the savings that refinancing your mortgage brings.