Retirement Tips: Is Refinancing Worth It?

If you have retirement on the horizon, you’ve probably been doing a lot of planning. Topics such as health care, designating a power of attorney, and IRA withdrawals are all top-of-mind for retirees. But have you thought about your financial planning as it pertains to your mortgage? Refinancing before retirement can be an advantageous choice for many—but is it the right choice for you? To figure out if this is the right option for you and your financial needs, be sure to consider the situation from all angles. 

First Thing’s First. Money.

Refinancing doesn’t come cheap. It’s only worth the cost if you come out ahead in the end. To start your financial journey, make sure to crunch the numbers carefully before making your decision to move forward with a refinance. To verify how a refinance will impact your bottom line, use our Mortgage Refinance Calculator to sort through a variety of factors (for example, your interest rate, closing costs, and how long you plan on staying in your current home) and see how your new payment would change.

Let’s Talk Long-Term.

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. Take some time to think about where you see yourself 10+ years from now. Do you plan on moving somewhere tropical after retirement or closer to family? How about downsizing or considering condominium options that boast less yard-care? Take all of this into account as you make your decision. 

The Big One… Taxes.

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 particular 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.

Know All the Options and Challenges.

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.

Learn the Benefits.

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. Such as:

·     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. You can also choose to let that money grow by investing it in the market or adding it to your existing retirement fund.

·     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!

·     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!

Community Financial has eight dedicated Mortgage Specialists who are ready to help get you the information you need and the refinance that makes sense for you. To learn more about our Mortgage Specialists or set up an appointment to speak with them, visit our website.

Refinancing your mortgage before you retire can help you sail into the next chapter of your life, debt-free. To learn more or get started with your refinance, call (877) 937-2328 or Apply Online Today! For even more help with your pre-retirement planning, check out our Retirement Income Calculator to make sure you’re on track with your retirement in every way.

Your Turn: Did you refinance before you retired? Which factors drove your decision? Share them with us in the comments.