Should You Refinance Your Mortgage Before Retirement?

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Every homeowner wants the lowest possible interest rate on their mortgage. And with interest rates at historic lows the thought of paying less interest and more on principal makes a lot of sense. But as appealing as the idea of refinancing is, homeowners nearing retirement should consider several factors before signing the papers. A refi mistake now can damage the retirement plan you’ve worked so hard to build.

What are the upfront costs

How much will you pay in closing costs? They usually run 2 percent to 5 percent of the mortgage loan. It’s rolled into the refinance and you may end up with a larger loan than you had.  The lender will provide you with a loan estimate, which will include all the closing costs as well as the amount of escrow that will be included in the new loan. Ask yourself if it’s worth spending thousands of dollars this close to retirement, especially if you’ll be on a fixed income when you retire.

What’s my new payment

How much will your new payment be? That amount should include property taxes and homeowner’s insurance. But remember, taxes and insurance go up from time to time and so will your payment. Can your retirement budget handle it?

How long will it take to break even

With all the closing costs, you now owe more than the actual payoff of your previous mortgage. Those costs are generally added to your new loan and it will take some time to pay those off before you start whittling down your mortgage amount, which is why you refinanced. But how long will it take to break even? If it takes 3 years, and you intend to sell the house and downsize in 2 years, refinancing doesn’t make sense, even if you’re payment goes down. But if you plan to stay in the house past the breakeven point, then refinancing may be an option.

Can you refinance with your current lender

You may be able to save some money if your current lender will refinance and give you the lower mortgage rate. The lender may be willing to waive some costs such as appraisal fees and application fees since they already know the house.

How long should the mortgage be

What’s the purpose of the refinance? If you’re trying to pay off the mortgage more quickly, a shorter loan may be best, but your payment will probably be higher. If you want more money in your budget, you may consider a longer-term loan. Either way, can your retirement budget handle it?

Will your house be affordable in retirement

If you need to spend a lot of money on repairs, you may be better off selling your current home and buying something newer that you DON’T have to sink a lot of money into. Keeping your current home may not fit in with your retirement budget, even with a refinance.

Bottom line

What will refinancing do to your retirement budget? You don’t want to do anything that will limit the retirement lifestyle you’ve always dreamed of.