Everything to Know About Refinancing a Mortgage During Retirement

FT Contributor  | 

Whether you’re just beginning to save for retirement or you’re already enjoying your days in retirement, it’s important to understand how much income you need to have in order to stop working. Ensuring you have plenty of retirement income is crucial to remaining financially stable and living comfortably without working. If your retirement budget looks tight, you may be considering how to obtain an additional source of retirement income so you can continue with your original plan to quit working at a certain age.

One possibility you may have if you own your home is to refinance your mortgage during retirement. This could reduce your expenses and increase the income you have access to while you’re retired. However, before you make the decision to refinance your mortgage in your retirement years, it’s important to understand the advantages and disadvantages of this financial strategy.

When deciding if you should refinance your mortgage in retirement, you’ll need to analyze your individual financial situation. Understanding the consequences and benefits that come along with a home mortgage refinance will ensure you’re prepared for what’s to come while living on a fixed income in retirement.

Benefits of Refinancing a Mortgage During Retirement

When you make the decision to refinance your home mortgage, you’ll generally obtain a lower interest rate or you may choose to lengthen your loan term. These two factors will make your monthly mortgage payments lower, which also lowers your expenses and creates more space in your budget.

Another strategy that may be beneficial to your budget is to refinance your mortgage into a shorter loan term. This will increase your monthly mortgage payments but you’ll pay off the loan sooner. You’ll also benefit from paying less interest over the life of the loan.

Be sure you have the extra income to afford this larger mortgage payment until the end of the loan term. Once you’ve paid off your mortgage, your monthly expenses decrease substantially, so you won’t need as much retirement income in your later years.

You may also find refinancing your mortgage during retirement to be beneficial if you already have a lot of equity in the home. You can opt for a cash-out refinance, which allows you to take out that equity as cash. During the refinancing process, you may also benefit from a lower interest rate with your new mortgage terms.

When you cash out the equity in your home, you have a lump sum of money that can help ensure your retirement funds last. However, it’s important to use this money wisely for your living expenses or to re-invest. Spending it frivolously leaves you in the same financial situation and you may need to look into additional sources of income to stay afloat.

Downsides of Refinancing a Mortgage During Retirement

Before you assume you can rely on refinancing your mortgage as a part of your retirement plan, consider the drawbacks as they pertain to your personal situation. If you refinance your mortgage and lengthen your loan term, your mortgage payments will be lower but you’ll be responsible for paying them for longer.

While it’s tempting to only look at the money you’ll save each month, consider how much you’ll lose over the life of the loan. The average life expectancy in the U.S. is steadily increasing and in 2018, it was 78.7 years. Be sure you’re prepared to make mortgage payments using your other retirement income sources throughout your retirement years if you lengthen your mortgage term.

While refinancing your mortgage shouldn’t hurt your credit score, being unable to make mortgage payments will. If you refinance for a shorter loan term to satisfy your mortgage faster, be prepared for higher monthly expenses. If your retirement budget is already stretched or you don’t feel adequately prepared for emergency expenses, such as a medical or home repair bill, refinancing to a shorter loan term might get you into financial trouble.

Things to Consider Before Refinancing a Mortgage

Before you consider refinancing your mortgage in retirement, review both the benefits and drawbacks as they relate to your financial situation. There are additional factors to consider, including the following:

  • How long you plan to live there: If you refinance for a longer loan term and plan to stay in the house forever, you’ll likely be responsible for mortgage payments until you pass away. If you plan to sell the home, be sure you’ll make enough profit to cover the refinanced mortgage.
  • How many years are left on the mortgage: If you only have a few years left before your mortgage is paid off, refinancing will reset these loan terms. Consider the length of your current loan and whether refinancing is beneficial to your retirement.
  • Your plans for the home when you pass away: If you refinance for a long loan term and you pass away before your mortgage is satisfied, your beneficiary is responsible for the mortgage. If you’re a baby boomer in retirement with children, before refinancing, consider what you want to leave your loved ones when you pass away.
  • Fees associated with the refinance: In addition to a potentially higher mortgage payment, you’re also responsible for closing costs when you refinance. It’s a financial transaction similar to buying a home, so it’s important to understand your additional financial responsibilities and how they affect your budget first.

How to Refinance a Mortgage During Retirement

As a retiree, the fixed income you receive from your retirement savings and Social Security benefits may not be enough to show lenders you’re prepared to refinance your mortgage. If this is the case, you may need to pay down your loan amount to show you’re financially stable enough to handle a refinance. Speak with a lender before paying down some of your mortgage to ensure this move is still beneficial to your budget.

Your 401(k) or individual retirement account (IRA) savings may not be included in your current income calculations, especially if you haven’t received distributions from these accounts yet. If you have a substantial amount of money in these retirement assets, ask your lender if you can annuitize them so they may also be considered as part of your income. With your retirement savings taken into account in your income calculations, it’s more likely you’ll qualify for a mortgage refinance.

When analyzing your retirement income, it’s important to ensure you have enough to last throughout the years you’re not working. Refinancing your mortgage may help you to pay off your home sooner or lower your monthly mortgage payments. However, you should weigh the pros and cons of a refinance before deciding if it’s right for your retirement budget.


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