Retire with your mortgage or refinance?
If you are age 55 or older and plan to retire in a decade or so, you need to evaluate your retirement funds and your desire to pay off your mortgage before signing that refinance application.
Financial planners have mixed feelings about whether homeowners should retire their mortgages before retirement.
"First, you need to think realistically about what you want your lifestyle to be in retirement," says Dennis McMurray, a financial adviser and principal with Bridge Wealth Management Group in Rancho Santa Margarita, Calif. "Do you want to stay in your home and pass it on to your heirs or do you want to sell it and downsize? Even if you are thinking of moving, maybe you want to keep it and use the property for rental income in retirement."
If you plan to sell your home within the next few years, a refinance may not make sense because you won't have time to recoup your costs.
McMurray says that while the perfect situation would be to enter retirement with plenty of savings and no debt, that's not always realistic for everyone. He says eliminating a mortgage payment before retirement can improve cash flow.
"The number one fear of people contemplating retirement is the fear of running out of money," says McMurray. "If you run through your savings and still have a mortgage, you'll be hitting a higher hurdle than someone without a mortgage."
Jude Boudreaux, a Certified Financial Planner and founder of Upperline Financial Planning in New Orleans, says that paying off your mortgage before you retire not only gives you flexibility, but also decreases the amount of money you need to fund your retirement.
However, if you are currently paying $500 or more extra every month to retire your mortgage early, you may be better off investing that money, says Joseph Adkins, CEO of Global Asset Management Group in Altamonte Springs, Fla.
"In fact, low mortgage rates give you more reason not to pay off your house because you can keep your housing payments low and get a tax deduction for the interest you pay," says Adkins.
If you are getting closer to retirement age, your natural inclination may be to refinance into a shorter-term loan in order to pay off your mortgage faster. But before you do that, there are some things to keep in mind depending on your individual circumstances.
"You should look for a lender who will offer you a loan for 10 years or even a specific term such as 11 or 12 years that matches the year you intend to retire," says Boudreaux. "But be careful to do the math and find the break-even point to determine how much you will really save. If it takes too long to recover your closing costs and transaction fees, it may not be worth it."
Adkins says it rarely makes sense to refinance into a shorter-term loan for borrowers who don't have a lot of retirement savings because the higher monthly payments on a shorter loan term could further reduce the borrower's ability to save.
Some borrowers may want to switch to a new 30-year fixed-rate home loan in order to reduce their monthly payments.
"If you intend to invest the extra savings for your retirement, this could be a good move, especially if you use the investment to pay off your mortgage in full at a later date," says Adkins.
Boudreaux says borrowers should be wary of extending their mortgage into a new long-term loan because even with the lower interest rate, they will pay more in interest over the life of the loan. However, he says borrowers could take advantage of lower interest rates if they refinance and then continue to pay the higher mortgage payment of their current loan.
"You'll have the benefit of the lower interest rate and you'll pay off your mortgage quicker if you keep making the payments you were used to," says Boudreaux. "You also have the flexibility of the lower minimum required payments so if something happens and you need to cut back, you'll still be able to afford your loan. You won't be locked into the higher payments of a short-term loan."
Boudreaux says that if you are just a few years away from paying off your mortgage, the cost of refinancing could quickly eat up any savings. He says homeowners should avoid paying points to reduce their interest rate. Doing so adds to the loan balance and therefore extends the time until borrowers reach the break-even point when their savings surpass the cost of refinancing. HSH.com's Tri-Refi refinance calculator can help you determine the best way to finance your refinance.
"You should refinance only if you can significantly reduce your monthly payments and will invest those savings to generate future retirement income," says Adkins. "If you lack the discipline to save for retirement, a shorter-term loan might be a better option because it works as a forced savings plan and will build your home equity faster."
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