Q: I’m in my mid-50s and I’m preparing to retire sometime down the line. I’m wondering if I should refinance my mortgage as part of my retirement planning. Is that a good idea?
A: Refinancing your existing mortgage can have a large impact on your financial health, for better or for worse. Be sure to consider all angles before deciding if a pre-retirement refinance is right for you.
The first thing you need to know before taking this step is that refinancing doesn’t come cheap. It’s only worth the cost if you come out ahead. Crunch the numbers carefully before making this decision.
The second factor to consider is how long you plan on staying in your home. Financial experts only recommend a refinance for homeowners who plan to continue living in their home for at least 10 years. Otherwise, it is unlikely that they’ll recoup the cost of the refinance.
Another important issue to weigh is the significant tax savings that many homeowners believe a mortgage affords them. While this may be true under certain circumstances, it is rarely the case for those who are nearing retirement.
Homeowners are offered tax deductions on the interest of their mortgage payments. However, toward the end of a mortgage’s life, most of the monthly payment is going toward the principal of the loan and not toward interest. This means the tax savings from an older mortgage are minimal.
If you are holding onto a mortgage for this reason, consider a refinance that will lower those small interest payments and help you be rid of your house debt before you’re ready to retire.
Next, understand that there are a few ways to refinance, only some of which make sense for a homeowner who is nearing retirement.
Here are the three primary ways to refinance a mortgage:
While the second two courses of action will afford you several long-term benefits, it is rarely a good idea to refinance a mortgage to a lengthier loan pre-retirement. Doing so has several disadvantages:
On the other hand, refinancing to a lower-interest loan, one with a shorter life, or a mortgage that offers both advantages together, can offer you several significant benefits upon retirement.Here are just a few of the reasons you may want to consider this kind of refinance before you retire:
Refinancing your mortgage before you retire, can help you sail into your golden years, debt-free. Talk to Chesterfield Federal Credit Union today to ask about your refinancing options. We’re committed to helping you achieve and maintain financial wellness through every stage of life.