Pros And Cons Of Refinancing During RetirementBy Mike Deane | Published February 12th, 2013
Mortgage refinancing involves paying off your current mortgage, and replacing that mortgage with another one that more closely meets your financial needs, or that allows you to save money on monthly payments or in the long-term. The reasons to refinance are many: you may refinance to take advantage of better interest rates, or you may want to switch to or from an adjustable rate mortgage to or from a fixed rate mortgage, or you may want to shorten or lengthen the terms of your mortgage. Each of these options has an upside and a downside, but there will always be some sort of fee attached to paying off your current mortgage before the terms are met.
The idea of getting better terms for your mortgage is usually a good one, but when you start to get near your retirement age, resetting your mortgage years back out can be counter-productive as too many things can turn against you. We’ll look at the pros and cons of refinancing close to your retirement years, and look at the refinancing must-haves if you decide that refinancing is the best option for you.
Pros of Refinancing Before Or During Retirement
Refinancing gives you better rates, which is good if you’re going into retirement and will be, most likely, getting a lower monthly income than you’ve had before. If you locked into a higher interest rate years ago, and there are now lower interest rates available for your mortgage, it can be advantageous. If, overall, you are paying less per month, and can keep the length of the mortgage the same, then it is a smart move to refinance.
An example would be if you are locked into a fixed rate mortgage of 5% for 30 years, and you’ve paid off 20 years of the mortgage, it’s a good idea if you can pay off your 30-year mortgage and lock into a 3% mortgage for the next 10 years; you’ll only be saving money, depending on the additional fees of refinancing. This is to say, that if you include the fees that are charged for refinancing (read the fine print!), and are paying less per month for the same amount of time, then it’s a no-brainer. There can be a downside to this arrangement, which we’ll discuss in the next section.
Cons of Retirement Refinancing
One of the downsides of refinancing is that often it comes at the expense of long-term planning. With a refinance plan, you may lower your monthly fees, but then be locked into a longer-term mortgage. This can be disastrous when you’re retired, as the lack of income can make it very difficult to pay down your mortgage for a longer period if and unplanned cost arises. The Employee Benefit Research Institute released its 2012 retirement report, which indicated that only 14% of people surveyed were confident they’d have enough money to live comfortably during retirement.
The idea of taking the extra money you would be getting each month from a lower rate to invest is always one that sounds great, but the stock market doesn’t guarantee any returns that you can easily bank on. We here at dividend.com are proponents of high quality dividend-paying stocks to get the money to work for you, but the idea of pushing your debt way out in your retirement years may be too risky. The idea that you will continue to work in your retirement years is not something that you can easily bank on, considering the fluctuating job market and the potential for health-related issues popping up, that can put a crimp in your best-laid plans.
The key is to do as much of the hard labor in your early and middle years so that you don’t find yourself in a debt quandary when you approach your “golden” years. Before you decide to make any moves that can add to your current deficit, please speak with a financial advisor to determine if there are any other options that you can consider (maybe even downsizing to a smaller home). For more ideas on how to make your retirement years more comfortable; check out How To Reduce Your Retirement Costs.
If you do decide that mortgage refinancing is best for you, there are some things that you must do:
- Shop Around
This seems obvious, but some homeowners mistakenly believe that the refinance market is uniform when it comes to rates and terms for your loan. Like getting a mortgage, refinancing requires getting quotes from different sources, bringing those quotes to other sources, and getting these lending institutions to beat the terms of their competitors. Make sure you visit a number of institutions, and let them know that you are visiting their competitors to get quotes – this will entice them to give you the best deal they can upfront.
- Account for Extra Costs
Make sure you know the penalties and fees for refinancing, and add this into your final analysis to calculate how much you’ll be saving with your refinance. Get these costs up front when you are shopping around, and make sure these costs are factored into your quote that you compare to other lending institutions.
- Lock Down Your Refinance Rate
The quotes you get are usually only good for a certain amount of time, usually 30 to 90 days, so make sure you follow up when you have the quote and terms you want, and lock it down.
The Bottom Line
Whatever your reason is for wanting to refinance, make sure you know all of the fees involved and plan for how it will affect you in the long-term. The best option is always to try to pay off your mortgage as quickly as possible, so that you have very few monthly expenses once you enter your retirement years. If that’s not possible, however, there are certain ways a refinance can work for you, but also many that will work against you. Make sure to discuss the options with a financial planner or consultant before you make a decision.