Estimating your expenses in retirement is one of the most difficult steps when you’re preparing for this stage of your life. Debt is often one of the most stressful expenses, so it makes sense that many people want to reduce the debt they need to repay while retired.
Often, people try to avoid carrying a mortgage into retirement. Given the recent drop in interest rates, some retirees who still have a mortgage may be considering a refinance. Refinancing can help lower the monthly payment on your mortgage or, alternately, reduce the length of time you’re repaying the loan. However, it’s not always the best decision. Here’s what you should know.
Potential Benefits of Refinancing a Mortgage in Retirement
You may consider refinancing your mortgage during retirement for a variety of reasons. The primary motivator for many people is reducing their monthly mortgage payment, especially if it is straining their budget.
Securing a lower interest rate can significantly reduce your monthly payment, as can refinancing for a longer period of time. With the second option, it is important to consider how prolonging your payments will affect you later in retirement, when you may have been planning to have no more mortgage debt.
You may want to consider taking the opposite approach and refinancing the mortgage into a shorter loan. Your payments would increase, but you could be free of the debt much faster.
Another reason why you may want to consider refinancing your mortgage is to capitalize on any equity that you have gained. With a cash-out refinance, you may be able to reduce your monthly payment and receive a cash payment. If you reinvest this money, you might be able to increase your monthly budget, or at least quell any anxiety you have about running out of funds later in retirement.
Sometimes, a cash-out refinance can help if your monthly expenses are more than expected—which can sometimes happen given the rising costs of healthcare. Extra money could also help you complete home repairs or renovations, which might be necessary if you plan to sell the property later in retirement. If you plan to capitalize on your equity, make sure you have a clear plan for what you’ll do with the extra money.
Possible Downsides of Refinancing a Mortgage in Retirement
Keep in mind that there are some disadvantages to refinancing during retirement. You should fully consider all the potential drawbacks before making your final decision so you aren’t caught off guard.
Again, the major point to consider is the impact of prolonging your mortgage. If you refinance for a lower monthly payment, think how it will affect your monthly budget to be making loan payments for years more than you planned. You also need to ensure that you’ll still be able to keep up with the payments in the future, even when your retirement nest egg is likely quite reduced. Additionally, consider the total cost of the mortgage over the life of the loan. Will you end up paying more in the long run just to reduce the payment you have now?
At the same time, you could also run into problems if you refinance into a shorter loan. Once you factor in all the fees associated with refinancing, your payment could end up much higher than you expected. While paying off the loan sooner is a good thing, you need to make sure you can afford the new payment and still have some bandwidth for dealing with unexpected expenses.
Always be sure to calculate all the fees involved in a refinance deal to ensure you understand the true cost. Many people are surprised by the fees and end up putting themselves in a precarious financial situation because they didn’t fully consider all the variables.
Most Important Points to Consider
As you consider whether a mortgage refinance makes sense for you in your retirement years, it’s important to ask yourself the right questions. Think about how long you plan to stay in your home and the feasibility of remaining there if your health deteriorates. Consider also the amount of time left on your mortgage and the timelines for refinancing.
Additionally, consider your legacy—for many people, this is critical. If you plan to pass your home along to heirs, you may want to prioritize paying off the mortgage so that you do not pass on that debt.
You should also have a clear reason for refinancing, whether that is to tap into equity, reduce your monthly payment, or pay off the home earlier. If you choose to refinance just because rates are low, that could be a poor decision, unless you have a clear strategy.
No matter what, make sure you understand all the closing fees and refinance costs. Sometimes, paying these fees out of pocket instead of rolling them into the mortgage can make sense for retirees, as long as you can afford the costs. And if you end up with extra cash, make sure you have clear plan for how you’ll put it to best use.