The record-low mortgage interest rate has led to an avalanche of refinancing applications, but if you are 55 or older, you should seriously consider refinancing as part of your retirement plan.
How close you are to retirement has a major impact on this decision: if you have 10 to 15 years more work ahead of you, your reasons for refinancing may differ considerably from someone who wants to retire within a year or two. If you are at least ten years old or older to prepare for your retirement, you may shorten your term to pay off your loan before you stop working. And if you retire earlier and know that you cannot remove your mortgage debt before your last day on the job, your goal could be to lower your monthly housing payment.
If you are not yet retired, you better do not refinance at all. Just because you can pay a lower interest rate does not mean that it is always useful to refinance – extending your loan means that you have to pay interest much longer. If you still have 10 years or less of your mortgage at the moment, you could end up paying more interest over the term of the loan if you refinance a 30-year mortgage. Worse, if you opt for a 15-year mortgage with higher payments, you could sabotage your retirement savings to make those mortgage payments.
How to decide if you want to refinance
To determine how you structure your refinancing or refinance completely, you must first ask yourself a number of questions:
- Where will you live First determine where you want to live when you retire. If you want to stay at home, refinancing to reduce your monthly payments or to pay your house in full more quickly can be logical. But if you want to move, you have to decide whether you want to keep your current home as an investment for rental income or want to sell it so that you can contract. This should be a consideration for any refinancing, regardless of where you stand on the retirement term.
- Will you retire? Ideally, anyone with zero debts and an abundance of savings could stop. Unfortunately this does not always happen. If you are refinancing to a 30-year mortgage and plan to retire in 15 years, you need a plan for how you want to make your mortgage payments on retirement or pay off the loan early. If you can afford a shorter loan period, you can pay off your loan faster and pay less interest.
- Which loan payment can you afford? Although many people are psychologically opposed to stopping mortgage debt, others are not. Refinancing a 30-year mortgage with low monthly payments can be useful if you have enough retirement savings to make the payments. Or maybe you want to lower your mortgage costs now to invest more in your pension fund every month. You can continue to deduct the mortgage interest, which reduces your tax burden after your retirement.
- Which type of loan makes sense? Fixed-interest loans are by far the most popular because it is easier to plan for the future if you know that your principal and interest payments remain the same for your entire loan. If you plan to relocate in a few years, you may be tempted by a state-of-the-art variable mortgage (ARM). However, before choosing an ARM, you must ensure that you know the maximum potential interest and payment. Even if you think you will be selling your property before your mortgage rate is adjusted, circumstances may change. You may want to keep your house and rent it, which can be more profitable if you have a mortgage with a low interest rate. Do not assume that you can refinance in the future, because no one can accurately predict mortgage interest or house value.
Mortgage loan options
Lenders nowadays offer a wide range of borrowing conditions, including the most popular 30- and 15-year fixed-rate loans, 20-year fixed-rate loans and even some loans with specific terms and conditions tailored to your individual needs, such as an 11- annual mortgage designed to coincide with your retirement date. Your tendency may be to refinance a loan in the shorter term so that you pay faster, but the payments are higher on a loan with a shorter duration, even if it has a lower interest rate than your current loan. Compare the interest rates and monthly payments on different loan conditions and compare the higher payment with the general interest savings on shorter-term loans to find a good match for you.
Remember that even if you opt for a 30-year loan, you can always pay off your mortgage faster by making bi-weekly mortgage payments, paying one extra mortgage payment per year, or simply paying more in principal each month. In this way, if your circumstances change and you do not have the extra money, you can always return to paying the minimum on your mortgage. Make sure you do not refinance in a loan with a prepayment penalty.
Adjustable interest mortgages
Some smart pre-retirees may consider low interest rates on an adjustable rate mortgage (ARM), such as a 5/1 hybrid ARM. With this mortgage, your interest rate remains the same for the first five years and can then rise or fall according to the limits set by the loan.
If you know that you can pay off your house within five years or are positive, if you sell it before the fixed-rate period ends, this can be an excellent way to save on your interest payments. That said, you should always be sure that you can pay the worst scenario with an ARM – the highest possible payment within the limits set by the loan – in case your plans change.
While you may focus on lowering your interest rate, shortening your loan period or reducing your monthly payments, remember that refinancing is not free. If your current lender offers you cheap refinancing, that may be a good option, but you still have to pay closing costs.
Closing costs vary by state and on average around 3% (or $ 3,000 on a $ 100,000 loan). If you have enough available home capital, you can convert those costs into your new loan balance, but this means that you pay that $ 30 in 30 years (or 15) and pay interest. You can also pay cash for these costs or opt for a refinancing with ‘zero costs’, which means that while you do not pay for the refinancing yourself, you pay a slightly higher interest rate to cover those costs for the refinancing. lifetime of your loan.
A quick calculation can tell you how long it takes to recoup the costs of your refinancing. For example, if you have paid $ 3000 to refinance and save $ 200 a month, it will take 15 months for you to recoup your refinancing costs.
When you compare mortgage refinancing options, you must compare the fees and associated interest rates and view the impact of those costs on your retirement plan.
Any decision to refinance loans must be made in the context of your personal finance. For example, a couple with many retirement savings plans and plans to retire within six years may opt for a 10-year low-interest loan and pay extra to end the mortgage before the work is stopped.
Another retiree with plans to retire in six years could make a big mistake by refinancing to a 10-year loan because she has to put every available dollar in her pension fund. She would do better to keep her current loan and perhaps make additional principal payments with a biweekly mortgage payment, instead of pledging more of her income to her mortgage.
Refinancing to reduce your payments or to shorten your loan period can be an advantage for your pension plan as long as you ensure that you keep your desire to repay your mortgage in balance with your saving needs. Compare not only your interest rate, but also your monthly payments and the total interest that you pay for different loan terms to determine which suits you best. For many homeowners, the costs of refinancing will not justify a new mortgage at all.
Have you ever refinanced your mortgage? If so, have you discovered that it is useful?
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