Your Guide to Refinancing Your Mortgage Before Retirement

Are you getting close to retirement and are considering refinancing your mortgage? One of the most important issues facing people of retirement age are their finances. Is refinancing your mortgage a good idea or an unnecessary expense? Here are several tips to help you make an informed decision about going forward with your next home loan.

To Refinance, or Not Refinance

One of the most important issues to consider before retirement, especially if you're going to be on a fixed income, is the cost. Every mortgage comes with closing costs and if paying fees outweighs the advantage you're getting, the answer is probably going to be to not refinance. How can you decide if paying the fees is worthwhile?

First, what is the reason you're considering refinancing your mortgage? Are you wanting to lower your payment to stretch your monthly income as far as possible? Do you simply want to pay off your home as quickly as possible and ditch your payment? Both are excellent reasons for paying for a new mortgage as long as you're comfortable with the costs you'll pay.

What about those no-cost refinance offers? You'll find those offers online and see them on television from time to time. There are no free lunches when it comes to your finances and the same is true for "no cost" mortgage loans. Every mortgage has fees, the difference in this case is that the lender is paying your closing costs in exchange for a higher interest rate. This reduces the benefit you'll get from refinancing and can make it more difficult to decide if refinancing is worthwhile.

Costs vs. Benefits

Is lowering your payment the goal? You can decide if refinancing is a good idea by approximating your break even point. Simply use our refinance breakeven calculator to add up all of our out-of-pocket expenses and divide by the amount your payment will be going down each month. This will tell you approximately the number of months it will take to break even, recouping your closing costs before you realize any benefit from the lower payment amount.

It's worth noting that the break even point is only an approximation and this only works if you're choosing a mortgage with an equal or shorter term length. Refinancing with a longer term (going from a 15-year to a 30-year for example) makes it impossible to recoup closing costs due to the added expense of financing those extra years.

Is refinancing for a lower payment worthwhile? If you like the new payment amount and you're comfortable with the amount of time it will take to recoup those out-of-pocket expenses, then refinancing your mortgage probably makes sense in your situation.

Tax Considerations

There are tax implications to consider when refinancing a home. Lowering your interest rate means less of a deduction for your income tax. Paying off your mortgage would eliminate any tax deduction you've enjoyed over the years; however, freeing up income from your monthly payment often trumps a mortgage interest deduction for many people.

Retirement can be an intimidating decision for many homeowners. The stresses of reducing your income and future uncertainty makes the decision to refinance that much more difficult. Weighing costs against the benefits and your break-even point will help you make an informed decision and could even save you thousands of dollars.

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