You’re 64 years old and entering retirement with a mortgage. With still low current rates, should you refinance a mortgage if you’re in or near retirement? Recently, I was asked what advice I had for a homeowner who has more than twenty years remaining on her mortgage who was considering a refinance. With a current balance of about $167,000 and a fixed rate of 5.25%, no other debt, and an excellent credit score above 820, there really is no easy answer.
When I was a mortgage broker, I could easily justify a quick answer with all the certainty of a man with one tool in his kit. To anyone with a hammer, all problems look like nails. But as a fiduciary fee-only financial planner, everything is more gray. And the answer that is more common is “It depends”.
Should You Refinance a Mortgage in Retirement
Whether or not it makes sense to refinance depends on your goals and time frame.
I know that the conventional wisdom is to refinance the loan especially if the rate you can get is at least one percent less than your current rate. Even with recent Fed rate increases, mortgage interest rates are unchanged and you’d likely find a conventional mortgage rate somewhere between the high 3% range to mid 4% range without many or any points. Such rates are certainly less than what this pre-retiree may be paying now.
But the bigger question is: Will you be moving within a few years? You may want to retire and downsize for example. Incurring the costs for a refinance would not make a lot of sense in that case.
Another question to consider: Are you refinancing because you’re looking to increase your cash flow? Obviously, at a lower interest rate for a 20-, 25- or 30-year term, you’ll probably find the mortgage payment for a new loan based on a lower original principal amount than your current loan will likely bring your payment amount down. (NOTE: Most lenders will only offer loans in increments of five years so you won’t likely find a 22-year term. You may always prepay to end your loan on the same time table).
I think that you should consider an option that increases your cash flow and releases the equity locked up in your home. You may want to look into retiree equity conversion loans. These types of loans are also referred to as “reverse mortgages” because the lender “pays” you and you are not required (but always have the option) to pay back principal or interest or both while still living in the property.
Such a strategy gives you more breathing room which will allow you to stretch your household resources. And by unlocking the equity, you can continue to live where you’re at without needing to relocate or downsize (that’s a quality of life issue that many retirees or soon-to-be retired folks like). And an equity conversion loan also allows you to maintain your separate investment portfolio longer. You can use the equity conversion loan to pay for things instead of taking taxable withdrawals from your investment or retirement accounts.
If you refinance your current $167,000 balance for a 20-year fixed term at 4.5% (just a guess), you’ll pay about $1,056 per month for principal and interest. If you do the same but for a 25-year term, your payment will be $928. Obviously, in either case, you’ll be paying more interest as this is a new loan. Yes, that is tax deductible (currently but that may change). How much of a difference is that from your current loan? Only you can tell. But think about how your cash flow improves if you didn’t have to make a cash outlay for either. That’s the power of an equity conversion / reverse mortgage.
AARP and Investopedia have great articles on such loans if you’re interested.
If you’d like an objective second opinion about your finances and are looking for a road map on how to live better by planning well, please reach out to Steve Stanganelli, CFP®, CRPC®, AEP® at Clear View Wealth Advisors, LLC. Email him at Steve@ClearViewWealthAdvisors.com.