Ought to You Refinance Earlier than Retirement?

Pros and cons of refinancing your mortgage loan before retirement

Many homeowners approaching retirement are striving to pay off their mortgages and enter their golden years with as little debt as possible.

However, with mortgage rates still competitively low, many are reconsidering this conventional wisdom — especially in today's financial reality, where many older adults are retiring with debt, whether or not to refinance.

If you need cash in retirement, refinancing your home can be a beneficial way to raise cash.

Check your refinancing options. Start here (01/15/2022)

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Benefits of Refinancing Before Retirement

Retiring with your mortgage paid off used to be a lifelong goal. But many of today's retirees have different attitudes towards mortgage debt than previous generations did.

For some, home equity is a financial tool.

Here are some reasons many are considering pre-retirement refinancing:

The prices are still cheap: Although mortgage rates are gradually recovering from their previous all-time lows, they are still below the double-digit rates many older adults may have experienced as homebuyers years agoReduce your monthly expenses: Depending on your current loan, paying off a mortgage with a higher interest rate and not withdrawing cash can lower your monthly mortgage payments. This could increase cash flow to fund your retirement savings or other personal financial goalsRefinancing today is cheaper than a reverse mortgage tomorrow: In addition to higher interest rates, reverse mortgages also generally come with higher upfront costs to close out the loan. Paying off pre-retirement refinance while you're still employed can save you money in the future, especially if you suspect your retirement savings won't be enough to cover expenses like medical expenses or long-term careYour income is higher: Underwriting a traditional loan is generally easier when you have employment and a monthly income than when you are retired and don't have a traditional salary

Refinancing goals for older homeowners

There are several common ways to refinance before retirement:

Leverage your home equity with a payout refinanceRefinance into a new loan with a lower interest rateExtend your existing mortgage into a new 30-year loanShorten your loan term to a 10- or 15-year mortgage

Each of these loan options has advantages and disadvantages. Understanding what makes sense for your financial situation is critical to a positive experience.

Check your refinancing options. Start here (01/15/2022)

Should you wait until retirement to refinance?

Waiting until retirement to refinance your mortgage loan is an option. However, if your income drops after retirement, you may have trouble qualifying.

Mortgage lenders use a borrower's income to determine whether or not they can repay a new loan. They also examine your debt-to-income (DTI) ratio and credit score to ensure you are a candidate for the loan.

Because retirees generally don't have a monthly salary, they must qualify for refinancing with funds from Social Security, pension, and other forms of income.

Consider pre-retirement payout refinancing

Do you own a home in your 50s or older and still have a mortgage? Perhaps you should consider cash out refinancing before retirement. This option might offer some flexibility:

Use the extra money to invest in your retirement savings, make a big purchase, or remodel your home. You may pay less if you opt for an adjustable rate mortgage and plan to move soon. They can allow you to pay off other high-interest debt and streamline all home loan payments

Tapping into home equity before retirement also has its downsides. You retire with additional debt. The costs may outweigh the benefits and there may be tax consequences.

So weigh your decisions carefully. Before you take the plunge, seek advice from lenders, tax, legal, and estate planning experts.

Benefits of pre-retirement cash-out refinancing

If you're nearing retirement but still making monthly mortgage payments, refinancing that loan may be a smart move. This is especially true if you can get a lower interest rate or shorter loan terms.

But it can also make sense to tap into the equity of your own home. Preretirement payout refinancing can:

Help save for retirement: You can use the money paid out to invest in your retirement accounts like your 401(k), IRA, or other retirement plans. "It's okay to take cash out of your house at lower rates when you can reinvest that money at a higher rate," broker and real estate attorney Bruce Ailion, "but to borrow at about 5% and at 3% in something like Treasury bills reinvesting makes no sense.”Increase your cash flow: This extra money can help fund a remodel, car purchase, college tuition, medical bills, and more. “You might have to remodel in the next few years, for example. Well, you might want to take care of that now. That's because you may have a harder time qualifying for a refi, home equity loan, or line of credit (HELOC) later on,” says Jennie Jacobson, mortgage loan advisor at Orange's Credit Union countyPossibly lower your monthly payments: Are you planning to move within a few years? Then it may be worth refinancing an adjustable rate mortgage that offers a low introductory interest rate. This period should coincide with the time you plan to stay indoors.Consolidate and pay off debt: You can use the extra money to pay off other high-interest debt. “Your cash flow can improve when you eliminate unsecured credit card debt. That's because this type of debt usually comes with large monthly payments," says Jacobson“Free” money for retirement: If you owe little to nothing on your home, refinancing can be beneficial. "If your mutual funds or stocks are making average annual gains that are higher than the interest rate you would take, you can essentially get some free extra money for retirement," says Jon Meyer, credit expert and licensed MLO of The Mortgage Reports

Refinancing payouts to build your retirement accounts can be risky at a time when many pundits and financial planners are advising safer investments that preserve your capital, rather than aggressive ones that can pay out more but also incur big losses.

Disadvantages of cash-out refinancing

Withdrawing money during a withdrawal refi is not a foolproof plan, and there are downsides:

It may cost more than it's worth: The refinancing is associated with closing costs. These can account for around 2% to 5% of the loan amount. Experts advise against remortgaging if you expect to sell your home within five years.You may need to move sooner than you think: "I find a lot of retirees and early retirees live in houses that aren't ideal," says Ailion. “The house you bought 10 or 20 years ago may not have aging features that allow you to live comfortably. Before you go further into debt through a new loan, consider where you want to live and what your needs are.”You can be in debt well into retirement: Let's say you're 60. If you take out a new 30-year mortgage, it won't pay off until you're 90. If you don't make it that long, your heirs will have to pay off the mortgage.Mortgage interest is not tax deductible: “Interest on withdrawal refis is now only deductible if the money is used for renovations. Suppose you use the money to pay off old debts or to supplement your retirement income. In that case, you can't deduct the mortgage interest from your taxes,” says attorney Elizabeth A. Whitman. She notes that this only applies if you list your tax deductions.This may affect your Medicaid eligibility: “Perhaps you are on a limited income and facing medical issues or nursing home care. Cash in the bank from a payout refi is not exempt,” adds Whitman. "It must be spent on eligible living expenses or medical care before you are eligible for Medicaid."You may be affected by a prepayment penalty: Some mortgages charge fees if you make an upfront payment before the end of the loan term. Check your credit documents carefully.

Interest rate and term refinancing

An interest-and-term refinance allows borrowers to change the interest rate, term, or both of their existing loan.

The goal is to save money by either lowering your monthly mortgage payment or paying less overall mortgage interest with a lower interest rate or shorter loan term.

For example, a homeowner can refinance:

30-year mortgage into a 15-year 30-year fixed-rate mortgage at 5% into a new 30-year mortgage at 3% fixed-rate From a 30-year fixed-rate mortgage at 5% to a 15-year fixed-rate loan at 3%

Considerations when extending your loan term

Not sure if you can afford the monthly mortgage payments on a shorter term loan? There is no shame in opting for a 30-year fixed rate loan.

"You can pay extra every month or every year to pay off your home loan faster if you have the extra money to do it," Jacobson suggests. (First check if there is no prepayment penalty.)

Remember: Choosing a 10-15 year loan can result in higher monthly payments. "And that may not be affordable after retirement," says Jacobson.

Even if you're planning on selling your home shortly after refinancing, don't sweat it.

"You can always sell," says Jacobson. “However, some loans may come with a prepayment penalty or a prepayment penalty. Ask your mortgage lender about products that are better in the short term. These may have a slightly higher interest rate but no closing costs.”

Refinancing alternatives for retirees

For homeowners nearing retirement age, cash-out refinancing doesn't always make sense. However, if you are interested in tapping into the value of your home, there are other loan options.

Rather than borrowing a lump sum of money, home equity lines of credit provide funds that you can draw on as needed. HELOCs typically have either low or no closing costs, as lenders often cover the incorporation fee.

Similar to a credit card, HELOCs extend credit as needed, but only for a set period of time called the draw period.

Make an informed choice

The good news is that mortgage lenders are not allowed to discriminate against you based on your age.

"But they can underwrite based on income and ability to repay the loan," says Whitman. "Let's assume you have a lower income today. Then the loan amount you are eligible for could be smaller and on less favorable terms.”

For these and other reasons, seek advice before making a credit decision. Determine if your new mortgage payment will hit your budget once you retire.

"Talk to a loan officer, CPA, and investment professional," Jacobson recommends. “The most important question is: is this new loan better than the existing mortgage I have now? If the answer is yes, you can estimate the cost and feel more confident about your decision.”

Today's low mortgage rates

Lenders and mortgage brokers are still handing out low interest rates to qualified homeowners.

Try using a refinance calculator to determine what makes sense for your personal finances.

Who knows? You might secure a lower interest rate this month than next month.

Confirm your new plan (January 15, 2022)

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