Locking in a mortgage sometimes feels like a gamble. If mortgage interest rates later go down, you'll feel like a chump for overpaying each time you write that monthly check.
Fortunately, you have the option to refinance in order to take advantage of lower interest rates—and perhaps even alter some of the terms of your mortgage in the process. And for many homeowners, it's a no-brainer: If the cost of refinancing is minimal, or low enough that you will soon get your money back through lower monthly payments, then refinancing makes sense.
However, for those who are near retirement, the decision to refinance may not be as clear-cut. Let's look at why.
If you're 10 years away from retirement
If you're a solid decade away from retirement, then refinancing could make financial sense. Consider refinancing your mortgage if:
- You're planning to continue living in your current home after leaving the workforce.
- You're paying 1% or more above the current going rate.
- You've built good equity in your home, have solid credit, and are therefore eligible for the best rate possible.
- You have an adjustable-rate mortgage and anticipate your rate going up in the coming years.
- You can refinance at a reasonably low cost.
Here's another option that may save you even more: If you can snag an exceptionally low rate and make a higher monthly payment, then consider refinancing a 30-year mortgage into a 15-year loan and making a few extra payments each year so that your mortgage will be paid off right around the time you enter retirement. All you need to do is make sure your new mortgage doesn't include a prepayment penalty, and you'll be on track to eliminate a major source of debt as you learn to live on a fixed income.
If you switch to a 15-year mortgage, make sure you can cover the higher monthly payment without limiting your retirement savings. It's better to owe money on your mortgage in retirement than to be left with no means of paying your basic living expenses because you failed to build enough savings during your working years.
If you're within three years of retirement
If you're at a point in your career where you can start counting down the months toward retirement, then you may want to try a different strategy. If you'll be able to afford your current monthly payments in retirement, or you expect to have your mortgage paid off (or mostly paid off) by the time you exit the workforce, then you're best off sticking with your current mortgage. That's because refinancing often comes at a cost.
Let's say you have a $100,000 mortgage at a 30-year fixed interest rate of 6%. By refinancing to a 4%, 30-year fixed-rate mortgage, you'll lower your monthly payment by $120 a month. However, this only makes financial sense if you can avoid closing costs on your new loan, which may not be possible. If you get stuck paying $4,000 in closing costs, then it will take you three years to break even, which means the extra money you spend to refinance could be better used to invest for retirement.
Remember: When you take out a mortgage, you're getting a loan to pay for housing costs. As long as you can swing that monthly payment, you'll have the flexibility to remain in your home for as long as you see fit. Although you may prefer to enter retirement without a home-loan balance hanging over your head, it's better to carry a reasonable monthly payment into retirement than to stretch yourself financially in an attempt to enter retirement mortgage-free.
Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917