The Retiree’s Guide to Refinancing Your Home
Posted December 12, 2020
Posted December 12, 2020
How you choose to pay for one of your largest investments—your house—can affect your cash flow well into retirement. You may have refinanced your home in the past and know it is a solid strategy to reduce your monthly payment, but there are discrete strategies for retirees to handle the remaining balance on their home loan. For Americans 65 and older, an estimated 34.5% of household income goes to housing costs.1 Such a large amount is worth careful consideration in your comprehensive financial plan.
Keep in mind that increased cash flow is the primary goal at this point in your life, not reducing rates. Which strategy best helps you achieve the result? Paying off your house and freeing up that third of your income holds appeal as a financial achievement. If your mortgage interest is higher than your investment earnings, or if the house is your highest-interest debt, eliminating your mortgage might prove advantageous to your goals.2 Otherwise, taking the opportunity to refinance at a low mortgage interest rate often provides a better outcome for your cash flow in retirement.
There are several refinancing paths to consider. The big picture of your situation alongside current rates is key to your game plan. When you refinance at retirement age, you add years to the payoff date, but you also regain more income and relieve stress on your investments.3 Securing a good rate on a low mortgage balance could free up tens of thousands of dollars every year. A shorter loan, alternatively, could help you pay off the balance sooner and save on interest.
If refinancing seems like a good option but you want to free up more of your income quickly, you could add money to your pocket in a cash-out refinance.4 When cashing out, the bank creates a new home loan for more than what you still owe. Part of your equity is included in the loan amount, which you get in cash. Typically, that number reaches up to 80% of your home’s value. Without restrictions on spending the cash (and sometimes finding a lower rate to boot), cashing out offers a way to reduce other, higher-interest debts or boost investments.
For homeowners 62 or older, a reverse mortgage gives you advance payments for your home’s value. Pausing your mortgage payment, the bank pays you the equity you have built up instead.5 Once the house is left to your family or other heirs, either the mortgage would need to be paid, or the bank would keep it. Another unique option that utilizes your home’s value, a home equity line of credit (HELOC), allows you to draw money at your convenience, similar to a credit card that you then payback.
If refinancing is the best strategy for you, act when mortgage rates are low, and you have a continued cash flow. To refinance, you will need to show stable income streams, including Social Security, pensions, and annuities. Make sure that, all combined, your income can sufficiently cover the new term of mortgage payments and unexpected costs, from home repairs to medical expenses.
Planning how the extra money will be used is important, whether you secure a lower mortgage rate or draw on years of equity. Mortgage refinancing does have drawbacks, which can be particularly disadvantageous for unprepared retirees. For instance, closing costs often reach 5–6% of the new loan amount and negate the benefit of a lower interest rate. Doing the math and budgeting wisely will be determining factors in making smart money moves with your house.
Considering your unique circumstances, Thayer Financial can help you determine how mortgage refinancing can help you meet your retirement goals. As financial advisors in Hickory, Thayer is your dedicated resource for fee-only, fiduciary advice. Please schedule an appointment or call us today.
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