Should you refinance before retirement?
Friday, 6 September 2019
Retirement planning reaches a new level of priority when your last day of work is less than a decade away.
Every financial decision you make at that point should consider the impact on your finances in retirement—including whether you should refinance your mortgage.
While many financial consultants recommend aiming to be debt-free in retirement, others say refinancing a mortgage can be beneficial in certain situations. Here's how to decide:
Do you need to refinance?
Do you plan on living in your home a long time? If you think you'll move in a few years, a refinance could be risky since you're unlikely to recoup the cost of refinancing before you move.
Paying down your principal with a lump sum or extra money each month can also get you to your goal of eliminating your mortgage before you retire. Online calculators can help you determine how much extra you need to pay in order to completely pay off your loan by a particular deadline. Of course, this is easier the closer you are to the end of your current loan term.
Compare your home loan with other options
Check out your current payment, how many years you have left on your loan, and your interest rate. Then check current mortgage rates to see what new payments you'd be making if you refinance. If you lower your monthly payments, you could free up cash to increase your retirement savings.
But keep in mind that if you refinance into another 30-year loan, you could end up paying more in interest over the long term since you've extended your repayment period —even if your payments are lower.
If your goal is to repay your loan faster, see if you can qualify for a shorter loan term, such as a 10-, 15- or 20-year loan, and comfortably afford the payments. While interest rates are usually lower on shorter-term loans, the payments will likely be higher because your repayment period is reduced. However, if you've been paying down your balance on your current loan for a long time, you may find that the payment difference isn't that large since you're financing a smaller balance.
Even “no-cost" refinancing will cost you something. Either you've increased your balance by rolling in the costs or you're paying a higher interest rate to the lender for the refinancing fee. Decide how you want to pay for your loan—but research and take advantage of mortgage refinancing calculators to help you compare scenarios.
Consider alternatives to refinancing
If you're tempted to take a chunk of your savings and eliminate your mortgage entirely, weigh the potential benefit of investing that money vs. the psychological benefit of owning your home without debt. A financial consultant can help you decide if that option is right for you.
Refinancing before you retire could be a smart move, whether your goal is to pay off your mortgage entirely before you stop working, or just to reduce your monthly payments. But make sure you consider all your options before making a final decision.
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