Pros and Cons of Refinancing a Mortgage in Retirement

Refinancing a Mortgage In Retirement Has Advantages and Disadvantages

REFINANCE MORTGAGE LOAN CONCEPT
••• cnythzl / Getty Images

Your home may be one of the most significant pieces of your wealth puzzle as you approach retirement. You also may be considering ways to reduce your expenses or increase your cash flow through your retirement years. If you still owe a mortgage on your home, refinancing could potentially help you achieve both of those goals.

However, before making any definitive decisions, it's important to look at how refinancing a mortgage could impact your overall retirement outlook. 

The Pros of Refinancing a Mortgage in Retirement

Generally speaking, refinancing a mortgage offers several benefits to homeowners. First, refinancing could help you reduce your monthly mortgage payments, which reduces the stress on your budget. Lower monthly payments can be achieved by reducing the interest rate, or by extending the lifetime of the loan.

Some homeowners may find it more beneficial to take the opposite approach and refinance their mortgage into a shorter loan. Your monthly payment may be higher, but you'll pay it off sooner and completely wipe mortgage payments off your monthly budgets. You could also save on interest, 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 apply to any homeowner, but they could be especially valuable for retirees. The U.S. Bureau of Labor Statistics estimates that the typical American between the ages of 65 and 74 spends an average of 32.4% 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 longer 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. Once you pay off your mortgage, you'll have extra cash to cover day-to-day living expenses. You could also continue to invest in your home's value by making repairs or improvements. That could be especially beneficial to those who plan 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 have a clear idea of how that money will be used, and how it will benefit your overall financial plan for retirement. Completing a cash-out refinance to go on vacation or help support adult children, for instance, doesn't offer any real financial benefit for your retirement. 

The Cons of Refinancing a Mortgage in Retirement

Refinancing a mortgage in retirement could have some downsides, depending on how you approach it. For instance, refinancing for 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 who is retiring can expect to live another 20 years. One in four retirees will live past age 90 and one in 10 will live past 95. 

Before going from a 15-year mortgage to a 30-year mortgage, make sure your savings, Social Security payments, and other forms of income will be able to keep up with those payments well into your retirement years. Your mortgage payment may be dropping by $300 per month, but you have to think about the total cost of that mortgage over the life of the new loan. 

Refinancing into a shorter loan term can also backfire if your retirement income and savings can't sustain higher payments. Even if you can make the payments, you need to make sure you have extra cash on hand to deal with any unexpected costs, such as sudden health issues.

Questions to Ask Before Refinancing a Mortgage

Asking yourself the right questions can help you decide if you're on the fence about refinancing. These questions are best answered with the help of a financial expert, but some can be answered on your own. For example:

  • How long do you plan to stay in the home, and 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 are you hoping to accomplish by refinancing? Do you want to reduce your rate? Lower your monthly payment? Withdraw equity?
  • If you're seeking lower payments, how much money would refinancing add back into your monthly budget?
  • 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 you use the extra cash? 
  • 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? How would paying out-of-pocket affect your savings?
  • What interest rate would you qualify for, based on your credit profile? How does this compare to the rate you're currently paying?