This is becoming a question amongst many retirees today. Should you refinance even though you are retired? As more Americans have bucked conventional wisdom in recent years and retired while still carrying a home mortgage, the market upheaval has created an opening to consider refinancing.
For retirees, however, the decision to refinance a mortgage isn’t simply a matter of weighing upfront costs against monthly savings to calculate how long it takes to break even. Older homeowners need to have a clear understanding of what they hope to get out of a refi, and what it means for the big picture of their planning. Yes, the monthly savings may mean a great deal in cashflow. It also may allow you to defer bigger withdrawals from overall savings. It is the planning we want to focus on.
If saving money over time is your primary objective, first do the math to see if that pans out. For one thing, costs. Which typically ranges from 2% to 5% of the principal. Depending on how much time you have left to pay, that money might be better used prepaying your mortgage by putting additional funds toward the principal each month. This should be a major consideration for your financial plan.
What many people also overlook is that refinancing restarts the clock on amortization. Does that really matter? If you’re 20 years into a 30-year loan, refinancing can reduce your monthly payment, but you could pay more in total interest over the life of the loan. That is unless you refinance to a lower rate but apply the savings to the principal each month to prepay your mortgage. However, contingent about estate planning, taking the infusion of cash now, or monthly cash flow savings, will offset future costs. In reality, the question becomes today’s money or tomorrow’s money. Which means more?
If You Can, Pay It Off
Even though financial advisors are no longer dogmatic about making sure retirees burn their mortgages before retirement, there is still tremendous value in doing so. Meaning, this can be an “in the pocket” strategic asset. One that can be called upon if needed for future cash. IE, long term home healthcare. The question once again is the value of your plan relating to today’s money.
As a retiree, you are faced with a unique opportunity. The overall cost of mortgage money. In your lifetime, the cost of mortgage money has never been cheaper. You can now weigh taking advantage of the money now when effective rates are something you have never experienced. In short, your access to tax-deductible money has never been cheaper from a pure rate perspective.
Cash Flow Is Key
If downsizing isn’t an immediate option and cash flow is a concern, paying off a mortgage might not be the first priority. The fact is if you’re 60, have a mortgage, and are worried about cash flow, the focus should be on reducing the size of your payment. In retirement cash flow is key and king! Why? Simple, you do not want the emphasis on your core investment income or social security. If you are facing a cash crunch, you do not want to refinance at that point. Forecasting and planning are the key right now.
Even in retirement, the most powerful financial tool at your disposal is your mortgage. It can protect income and assets. It can also allow you to pay off unnecessary debt, installment loans, and assist your children. Now is the time to take action. Sit with a qualified advisor and review the options available to you. Retirement can become stressful but know there are many options available to you. This mortgage market is made for you.