Record-low mortgage rates have been generating an avalanche of refinance applications, but if you’re age 55 or older, you need to seriously consider refinancing in the context of your retirement planning.
How close you are to retirement has a big impact on this decision: If you have 10 to 15 more years of work ahead of you, your reasons to refinance may be a lot different from someone who intends to retire within a year or two. If you have at least a decade or more to prepare for retirement, your goal could be to shorten your term in order to pay off your loan before you stop working. And if you are retiring sooner and know you can’t eliminate your mortgage balance before your last day on the job, your goal could be to lower your monthly housing payment.
If you have yet to retire, you may be better off not refinancing at all. Just because you can pay a lower interest rate doesn’t mean it always makes sense to refinance – extending your loan term means you must pay interest for a much longer period of time. In fact, if you currently have 10 years or less left on your mortgage, you could end up paying more interest over the life of the loan if you refinance into a 30-year mortgage. Worse, if you choose a 15-year mortgage with higher payments, you could be sabotaging your retirement savings in order to make those mortgage payments.
How to Decide Whether to Refinance
To determine how to structure your refinance or whether to refinance at all, you need to first ask yourself a number of questions:
- Where Will You Live? First, decide where you want to live when you retire. If you want to stay in your home, refinancing to reduce your monthly payments or to more quickly pay off your home in full could make sense. But if you want to move, you need to decide if you’d like to keep your current home as an investment for rental income or sell it so you can downsize. This should be a consideration for any refinance, regardless of where you stand on the retirement timeline.
- Will You Retire With Debt? Ideally, everyone could retire with zero debt and an abundance of savings. Unfortunately, this doesn’t always happen. If you are refinancing into a 30-year mortgage and intend to retire in 15 years, you need a plan for how you will make your mortgage payments in retirement or pay off the loan early. If you can afford a shorter loan term, you can pay off your loan faster and pay less in interest.
- What Loan Payment Can You Afford? While many people are psychologically opposed to retiring with mortgage debt, others are not. Refinancing into a 30-year mortgage with low monthly payments can make sense if you have enough retirement savings to make the payments. Or, you may want to reduce your mortgage payments now in order to invest more each month in your retirement fund. You can continue to take the mortgage interest tax deduction, which will reduce your tax burden post-retirement.
- What Type of Loan Makes Sense? Fixed-rate loans are by far the most popular because it’s easier to plan for the future when you know that your principal and interest payments will stay the same for your entire loan. If you plan to move in a few years, you may be tempted by a super-low adjustable rate mortgage (ARM). However, before you choose an ARM, make sure you know the maximum potential interest rate and payment. Even if you think you will sell your home before your mortgage rate adjusts, circumstances can change. You may want to keep your home and rent it, which could be more profitable if you have a low-interest fixed-rate mortgage. Just don’t assume you can refinance in the future, because no one can accurately predict mortgage rates or home values.