The clock is ticking, and you are near your retirement or recently retired. Whatever the case may be, your focus should be on tackling your finances smartly. So, if your priority is to cut-back on expenses, then refinancing can be a smart move.
Refinancing for retirement is suitable if you’re trying to reduce your monthly payments or get a lower interest rate, but like anything else, timing is an essential factor. So, before pulling the trigger, carefully consider the pros and cons of refinancing before or during your retirement.
Pros of Refinancing for Retirement
– Extra Money in Your Budget
Once you retire, you should consider the possibility of a dip in your income. Thus, lowering your overhead costs can become a necessity. In that case, refinancing can be a boon for you. Refinancing means a significant reduction in your monthly payments. It gives you extra cash which can be used for emergency savings or to max out your retirement accounts.
In fact, you can use the cash-out money to invest in your retirement savings through a 401(k), IRA, or other plans. It’s an excellent option to cash out of your home at lower rates if you can reinvest the money at a higher interest rate. But it doesn’t make sense to borrow at five percent and then reinvest in something like Treasury Bonds at three percent.
– Affordable Mortgage
If you’re nearing retirement, but still pay a mortgage, refinancing can streamline your repayment. Especially if you’ve taken a home equity loan along with your original mortgage, then refinancing lets you combine the two into a single payment which is obviously a more affordable option. In cases where your home equity loan or credit line is at a variable rate, refinancing gives you the opportunity of tying it to a fixed rate. Thus, it gives you the stability of knowing your monthly payment.
– Easily Cash out Your Equity
Apart from potential savings, refinancing is also a good choice for homeowners who want to get a hold on their equity. Once you acquire the cash, you can use it to clear your credit card dues or any other high-interest rate debts. Getting rid of the loan puts you back in charge of your money, and you can use the money for upgrading your property if you eventually decide to sell.
In fact, you can use the extra cash to fund a remodel, auto purchase, tuition, or paying off the medical bills. Let’s say you need a repair in the next few years. You may want to do it now because it can be more challenging to qualify for a refinance or home equity loan later.
– Tax Break Is Still Possible
When refinancing into a longer mortgage term, you’re also increasing the amount of time you’ll be able to claim the deduction. Presently, house owners can deduct the interest they pay towards their mortgage every year. So don’t worry about your tax bracket increasing after drawing on your retirement income as it takes time to get the benefit of every possible write-off.
Cons of Refinancing for Retirement
– Refinancing Is Going to Cost You
When you are refinancing, it means you are taking a new loan. This implies that you’ll be on the hook for paying the closing costs again. Usually, closing costs add up to two to five percent of the loan value. So, if you still owe a large amount of money on your first mortgage, then be prepared for shelling out several thousand dollars to close the deal. Depending on how much is your remainder, it can take anywhere from three to seven years to recover the expense, probably costing you some of your savings in the process.
– Loan Repayment Period Can be Extended
Before refinancing, you should decide what type of mortgage term to go with. Shorter-term means higher payment, but you’ll be paying off your home at a faster pace. If you are left with 10 to 15 years on your current mortgage and refinance it to a 30-year term, your payments will be much lower, but there are high chances of you owing the money on the home in your retirement.
For instance, if you own a home with a lot of equity but are on a cash crunch, check out a reverse mortgage. This gives you quick cash by allowing you to borrow against your home’s equity. If you lack surplus funds, then a reverse mortgage will be easier to qualify for than cash-out refinancing.
– Difficult to Tap into Your Equity
If your expenses aren’t under control, it doesn’t make sense to pull equity and pay off your credit cards. Unless you’re systematically planning your budget, keeping track of your purchases and savings, and setting feasible financial goals, you can end up messing up your balances. When it’s time to retire from your job for good, you may end up in the exact position as you were before you refinanced.
– Chances of Penalty
Before you take the plunge, analyze your existing mortgage terms carefully to see if there is a prepayment penalty. Usually, prepayment penalties start from two to four percent of the loan, and not all lenders charge them. But if you are paying the penalty along with the closing costs, then you are reducing your chances of any potential savings from refinancing in the future.
Final Words on Refinance for Seniors
No doubt refinancing in retirement has its benefits, but you must be aware of the downsides before taking this step. Moreover, try to avoid some of the common refinancing blunders in the process.
Take a look at the big picture of your retirement and decide whether a refinance suits your situation. You can take the help of a financial adviser in evaluating your financial situation and analyzing if a refinance will serve your long-term goals. Evaluate if your new mortgage payment will strain your budget once you retire.
The most crucial question to ask is: is this loan better than the one I have right now? If the answer is yes, you can compute the costs and feel more confident about your choice. Whatever the case may be, do thorough research and avoid making a hasty decision. It’s always better to make an educated choice.