When mortgage rates drop, you may think about refinancing your home. In some instances, refinancing can help lower monthly payments and free up funds for other things, like paying a mortgage off sooner. However, if you are approaching your retirement, there are some additional considerations to keep in mind.

First, what are the benefits of refinancing?

Savings and lower payments

Refinancing to a lower rate can help homeowners at all life stages and income levels have the opportunity to pay less for their homes each month. This is especially true if homeowners purchased their homes when interest rates were higher, and they have not already taken advantage of historically low rates. The fact is that shaving as little as one percent off the current interest rate can net substantial savings over the remainder of a loan. 

Pay off mortgage sooner

If the new, lower interest rate is low enough, you can continue making the same monthly payment, and potentially shave years off the life of your mortgage. Combine that with making one or two extra payments each year, and you could shave even more years from your loan, reducing the amount of interest you pay over the loan term.

What should you consider when approaching retirement?

With the potential benefits that refinancing has to offer, it may seem like a smart thing to do. If you are approaching retirement though, you will want to be aware of some possible disadvantages.

Will savings offset the cost?

When refinancing to a lower rate, your main consideration should be whether you'll actually save enough with a lower rate to offset the closing costs you pay to refinance.  The rule of thumb is to calculate your break-even point. In other words, how many years will it take for your cumulative savings to surpass the fees you paid to refinance?

Compare your break-even point to the number of years you intend to remain in your home. Do you think you may want to downsize, move closer to children, enjoy a warmer climate or the freedom of condo living? If you think you may not remain in your home long enough to recoup refinancing costs, it may not be the best way to go.

What is your purpose for refinancing?

In some instance, homebuyers will do what is called a cash-out refinance. This means the refinanced mortgage loan is for a larger amount than the existing one, and the homeowner gets the difference between the two loans in cash to spend on other purposes. If you are a person looking at a cash-out refinance as a way to pay off debt or make home improvements prior to retirement, this could prove to be a financial burden rather than an advantage.

Consider carefully before extending the burden of making monthly mortgage payments into your retirement years. Your goal at this point in life should be to reduce monthly payments and reduce debt. Also, if you have lived in your home for a while, you most likely have built up equity. Increasing your mortgage could eat away at that equity, which could otherwise be used for financial emergencies in retirement.

Making your decision

The best rule of thumb when deciding whether to refinance is to do the math.

  • Will you reduce monthly mortgage payments?
  • Will you be in your house long enough to recover closing expenses?
  • Can you avoid lengthening the life of your loan or losing equity?

If your answers are "yes," and you can use your savings to pay down debt or invest during the time you have remaining before retirement, then refinancing may be of benefit to you. An experienced mortgage lender can work with you to make the right decision.

Does it make sense to refinance?

Our refinancing calculator can help you determine how long it will take for you to recover closing costs and break even.

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