Blog posted On March 11, 2021
By the time you retire, your finances should be pretty consistent, which is why the thought of making a large financial move like refinancing can be intimidating to some. However, refinancing when you’re retired can bring you similar benefits to when you were still working, and can be a smart financial move for many.
Pros of Refinancing a Mortgage in Retirement
Lower Interest Rate
The biggest reason why most people refinance their mortgage – regardless of age – is to switch to a lower interest rate. Lower interest rates mean smaller monthly payments, and thousands saved over the life of your loan. The less money you spend on mortgage payments, the more money you can spend on what matters most – like spoiling grandkids or traveling to see family.
Shorten or Lengthen Loan Term
Refinancing your mortgage gives you an opportunity to either shorten or lengthen your loan term, depending on your financial needs. If you are in a good financial position – making your monthly payments easily with substantial money in emergency funds – then shortening your loan term could be smart. Shortening your loan term might raise the amount of your monthly payments, but it can also help you pay off your loan faster and save money on interest. On the other hand, if you are in a more uncertain financial situation and find yourself in need of more money in your monthly budget, you could lengthen your term, which would lower your monthly mortgage payments.
If you have built enough equity in your home, then refinancing could be a good opportunity to get cash out to help cover other costs like home improvements, higher education, or debts. In order to qualify for a cash-out refinance, you should you have at least 20% equity in your home. Then, you can pay off your existing home loan and replace it with a new, larger mortgage and receive cash for the difference between the two loans. For example, if your home is valued at $350,000* and your current mortgage balance is $250,000, you have $100,000 in home equity. With a cash-out refinance, you can make a new home loan higher than your previous balance of $250,000, but normally it will not be able to exceed 80% of your home’s value. Therefore, your new loan would be a maximum of $280,000, giving you $50,000 in cash.
When you buy a home, you will likely have to pay for mortgage insurance until you reach 20% equity. Every year, your mortgage insurance costs about 0.45% to 1.05% of your loan. That’s $3,500 per year for a $350,000 loan. When you refinance, you have the opportunity to cancel this mortgage insurance if you have built enough equity in your home. Then, you can take that vacation, visit that family member, or simply pay off other debts.
Cons of Refinancing in Retirement
As with refinancing at any age, closing costs are always a consideration. Closing costs can be anywhere from 2% to 5% of your loan value, and while they can be rolled into the loan, you would then have to pay interest on them. When deciding whether or not to roll your closing costs into your full loan payment, look at how long you plan to live in your home. If you plan to live in your home for a long period of time (5+ years), then consider paying your costs upfront. This way you will not have to pay interest on them. If you plan on selling your house in under five years, then consider rolling your closing costs int your loan. This way, you likely will pay less than the upfront costs, even though you will be required to pay interest.
Adverse Market Refinance Fee
On December 1st, 2020, the On December 1st, 2020, the Federal Housing Finance Agency (FHFA) began imposing the adverse market fee on conventional mortgage refinances, which is a 0.5% fee. This extra protection for Fannie Mac and Freddie Mac comes out as a minor charge for you (and is waived on government loans or loan balances less than $125,000) but is still a consideration when refinancing.
Refinancing in retirement may sound scary, but in reality, it can have many benefits. If you would like to learn more about how to refinance your home in retirement, please contact us and we would love to help.
*Payment example: If you choose a $250,000, 30 year loan at a fixed rate of 3.3% (APR 3.5%), with a loan-to-value of 80%, you would make 360 payments of $1,122.61. Payment stated does not include taxes and insurance, which will result in a higher payment.