Pros and Cons of Refinancing a Mortgage in Retirement
Refinancing a Mortgage In Retirement Has Advantages and Disadvantages
Your home may be one of the most significant pieces of your personal wealth puzzle as you approach retirement. As you prepare to retire, you may be considering ways to reduce your expenses or increase your cash flow. If you still owe a mortgage on your home, refinancing could potentially help you achieve both of those goals. But, it's important to look at how refinancing a mortgage could impact your overall retirement outlook before making a move.
Refinancing a Mortgage in Retirement Pros
Generally, refinancing a mortgage offers several benefits to homeowners. First, refinancing could help you get a lower interest rate on the loan. A lower rate could also result in a lower monthly payment, making housing costs less stressful on your budget. You could also achieve a lower payment by refinancing a mortgage into a longer loan term.
On the other hand, refinancing a mortgage into a shorter loan would allow you to pay it off more quickly. Your monthly payment may be higher but you could realize some interest savings, depending on how long you've had the mortgage. If you have substantial equity in the home, that's yet another reason to consider refinancing. A cash-out refinance would allow you to tap your equity while also potentially lowering your mortgage rate.
These benefits could apply to any homeowner but from a retirement perspective, there are several good reasons to consider refinancing a mortgage.
First is the prospect of lowering monthly housing costs. The U.S. Bureau of Labor Statistics estimates that the typical 65- to 74-year-old spends an average of 32.4 percent of their household income on housing annually. If your retirement nest egg isn't as large as you'd like it to be, refinancing at a lower rate, or into a longer mortgage term, could reduce your payments and add valuable dollars back into your monthly cash flow.
That money could come in handy if retirement coincides with rising health care costs. The average 65-year-old couple will need approximately $275,000 to cover health care expenses in retirement, according to a 2017 Fidelity Investments report. That total does not include the cost of long-term care, which isn't covered by Medicare. Medicaid pays for these expenses but only after a retiree has spent down their assets.
A cash-out refinance could serve the same purpose. It could also provide you with cash to cover day to day living expenses or make necessary repairs or improvements to the home that could raise its value. That might be of benefit if you'd like to sell the home at some point in retirement. If you're considering refinancing a mortgage to pull out your equity it's important to be clear on how that money will be used. Completing a cash-out refi to go on vacation or help support adult children, for instance, doesn't offer any tangible financial benefit for your retirement.
Refinancing a Mortgage in Retirement Cons
Refinancing a mortgage in retirement could have some downsides, depending on how you approach it. For instance, if you were to refinance into a longer loan term could yield immediate financial relief in the form of lower payments but you have to consider how sustainable that is for your budget.
According to the Social Security Administration, a typical 65-year-old retiring today can expect to live another 20 years. One in four retirees will live past age 90 and one in 10 will live past 95.
If you're going from 15-year mortgage to a 30-year mortgage in retirement, you have to be sure that your savings and income from other sources, such as Social Security, will be enough to keep up with those payments and your other expenses for the next two to three decades. Your mortgage payment may be dropping by $300 per month but you have to think about the total cost of the mortgage over the life of the new loan.
Refinancing into a shorter loan term can also backfire if your retirement income and savings isn't enough to sustain higher payments. If you develop a serious health issue, for instance, you may find yourself paying more out of pocket for medical bills.
Those costs could make keeping up with higher mortgage payments more burdensome for your budget.
Questions to Ask Before Refinancing a Mortgage
If you're nearing retirement or you've recently retired and refinancing is on the table, asking yourself the right questions can help you decide if it makes sense. For example:
- How long do you plan to stay in the home? How many years are remaining on the mortgage?
- Will you pass this home on to your children when you pass away? If so, does your estate have sufficient assets to pay off any remaining mortgage balance?
- What is the goal for refinancing? Reducing your rate? Lowering your monthly payment? Withdrawing equity?
- How much money would refinancing add back into your monthly budget if you're getting a lower payment?
- If you're refinancing into a shorter term loan, how would that affect your budget?
- If a cash-out refinance is in the cards, how would that cash be used?
- How much will the refinance cost, in terms of closing fees? Will this money be paid out of pocket or rolled into the loan? How would rolling the costs into the loan affect the monthly payments?
- What interest rate would you qualify for, based on your credit profile? How does this compare to the rate you're currently paying?
Thinking about all of these issues can help you get a better understanding of whether refinancing a mortgage in retirement is the right choice.