09/08/2012 05:01 am ET

Should You Refinance Near Retirement?


By Joe Udo

Mortgage rates are near historical lows. But should you refinance if you are near retirement? It might be worth your while to crunch the numbers.

If some or all of these apply to you, then refinancing might save you some money in the long run.

  • You are paying at least 1 percent more than the current rate.
  • You plan to stay in your current home after retirement.
  • You have at least 20 percent equity in your home, which will make it easier to refinance and get the best rate.
  • You have good credit and can get the best rate.
  • You have an adjustable rate mortgage.
  • Your bank is offering a low or no cost refinancing option.
  • Whether you should refinance also depends on how close you are to retirement.

10 to 15 years from retirement

If you are 10 to 15 years from retirement and can afford a 15-year fixed rate mortgage (FRM), then it is a great time to take advantage of the low rates. You can coordinate the pay off date with your retirement date and eliminate mortgage payments once you retire. It’s a worthy goal to have no debt in retirement. Your income will most likely drop significantly after you retire, so eliminating mortgage payments will significantly stretch your retirement budget.

Talk to your bank’s mortgage department, and they can run some scenarios for you. See if you can afford the 15-year or 10-year FRM. It will be worth paying more now so you don’t have to worry about mortgage debt later.

1 to 3 years from retirement

More people than ever are retiring with mortgage debt. This is not ideal, but sometimes there’s no reasonable alternative. If you are retiring in the next few years and still have five or more years left on your mortgage, then you need to calculate if you can make the mortgage payment without a paycheck. Many of us won’t have a pension and a Social Security check alone may not cover the entire mortgage payment. If you have retirement savings and are able to cover the mortgage payment, then it’s best to leave it alone and not refinance. However, if you can’t afford the mortgage payment, but still want to stay in that home, then refinancing might be a good option.

In this case, you might be able to lower your mortgage payment quite a bit by refinancing into a 30-year FRM. For example, let’s say you took out a 30-year FRM at 5 percent for $160,000 and have a monthly payment of $860. Then you paid the loan faithfully for 20 years and managed to halve the loan balance to $80,000. However, once you retire next year, you won’t be able to afford the $860. You may also want to free up some cash to spend on traveling and other hobbies that you were hoping to engage in during retirement.

If you refinance to a new 30-year FRM at 3.5 percent for $80,000, your monthly payments will be reduced to $360. By refinancing, you could reduce your monthly cost by $500. Cash flow is important in retirement, and you need to ensure your reduced income can cover your expenses. Cutting your housing expenses by $500 will go a long way toward making retirement a realistic possibility. Of course, you will be starting the mortgage term over and may not live the 30 years it takes to pay off the loan. The person who inherits your house may need to sell it and pay back the bank when the time comes.

Of course, if you can pay off the mortgage before retirement by making extra payments, then that’s the best option.

In retirement

It will be more difficult to get a refinance deal from a bank with less income. You can try to see if a financial institution will work with you, but it will generally be much easier to refinance before you retire. Moving to a less expensive home or a rental is also a good option when you are not tied down to a job anymore. A reverse mortgage is another option if you plan to stay in your home the rest of your life and are willing to scrutinize the fine print.

Refinancing is not the right move for everyone. You need to go over the numbers and see what makes sense for your situation. Most of the time, it’s better to choose a 15-year over a 30-year FRM, but not always. The best case scenario is to retire without debt, but the reality is not everyone can do that successfully.

Joe Udo left his corporate job by reducing expenses and increasing passive income. He blogs about his journey to early retirement at Retire by 40.

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