Refinancing Your Mortgage Loan as a Retirement Strategy: Is It Right for You?

Mortgage refinancing as a retirement strategy

Mortgage and retirement might seem like distinct concepts, but they are intrinsically linked. Refinancing your mortgage as you near retirement can adjust your financial obligations to better match your anticipated retirement income. As part of your retirement strategy, it can help reduce monthly expenses, lock in lower interest rates and free up cash for investments crucial for your retirement years. 

For retirees, a major question is often: How much money do I need to retire? Retirement income typically decreases compared to pre-retirement levels. Therefore, adjusting monthly expenses to align with retirement income is necessary. The primary goal of refinancing is often to reduce monthly expenses and increase cash flow. You can secure your financial future by integrating mortgage refinance strategies into your retirement planning.

When should you consider refinancing your mortgage?

When should you refinance your mortgage as you approach retirement? Timing is crucial. Key indicators include:

Interest rate drops: Refinancing is most advantageous when rates are significantly below your current mortgage rate. A rule of thumb is that a 1% rate drop might make refinancing worthwhile.

Improved credit score: If your score has improved since you first obtained your mortgage, you might now qualify for lower mortgage refinance rates.

Equity build-up: Refinancing might be worthwhile if you have accumulated significant home equity. Among U.S. homeowners, home equity represented a median of 45% of their net worth in 2021 (Kochhar & Moslimani, 2023). That’s a valuable asset you can leverage through cash-out refinancing to pay off higher-interest debt or bolster your retirement savings.

Changes in financial goals: As retirement nears, your financial goals shift. If reducing monthly expenses or paying off your mortgage faster aligns with your plan for retirement, refinancing might be the right step.

Benefits of refinancing before retirement

Refinancing your mortgage before retirement offers several financial benefits. Each of these benefits provides a cushion that can help secure a more comfortable retirement:

Lower monthly payments

One of the obvious immediate benefits of refinancing is the potential to lower your monthly payments. There are two ways to achieve this: securing a lower interest rate or extending the amortization period of your mortgage loan. For someone on a fixed retirement income, lower monthly payments can make a substantial difference in the quality of life and the ability to manage unexpected expenses.

Reduced interest rates

Securing a lower interest rate reduces your monthly payment and decreases the amount of money that goes toward interest over the life of the refinance loan. As a result, more of your payment goes towards the principal balance, allowing you to build equity faster.

Tap into home equity

You might have built significant home equity through renovations, real estate appreciation and principal repayments. By choosing a cash-out refinance, you can access a portion of your home’s value in cash. Then, deposit this cash into retirement savings, investments or paying off higher-interest debt. 

Shortening your loan term

Typically, a mortgage is your largest expense. You might not want to take this significant burden into retirement, given that the average retirement benefit of $1,866 (Social Security Administration, 2024) barely covers living expenses. In this case, a shift to a reduced term — 30-year to 15 or 10-year — to pay back your mortgage sooner is appropriate. And if anything, you save up thousands in interest payments. 

How to plan for mortgage refinancing

If the conditions are right, then you can start planning for a mortgage refinance. This process requires a methodical approach to avoid delays. Here are the steps to prepare:

Assess financial health

Start with a thorough evaluation of your current financial situation. This includes understanding your credit score, total debt obligations and monthly income and expenses. You should also evaluate your savings and how they align with your anticipated retirement needs.

Understand market rates

Keeping informed about current mortgage rates and economic trends can help you time your refinance correctly. Before pulling the trigger, use a mortgage refinance calculator to assess whether the new mortgage will improve your financial situation in terms of monthly payments and interest.

Choose the right loan type

Consider different types of loans available for refinancing, such as fixed-rate, adjustable-rate or interest-only loans. Each has benefits and drawbacks depending on your specific financial situation and how long you plan to stay in your home. For example, a fixed-rate mortgage would be appropriate if you expect to stay in your home for the rest of your life and have a low tolerance for higher rates.

Calculate break-even point

The break-even point is when the savings from your lower monthly payments offset the refinancing costs. Calculate this by dividing the total closing costs by the monthly savings. Refinancing may be a good option if you plan to stay in your home beyond the break-even point.

Gather necessary documentation

Prepare the requisite documentation, such as income statements, tax returns and credit reports. Having these documents ready simplifies the refinancing process and improves your chances of getting approval.

Evaluating If mortgage refinancing is right for your retirement plan

Mortgage refinancing has its pros and cons. To be sure, it will alter your expenses and cash flows during retirement. Therefore, deciding if refinancing your mortgage is appropriate for your retirement plan must involve several considerations:

• Cost vs. benefit analysis: Ensure that the benefits of refinancing, such as interest savings, outweigh the costs, including closing costs, appraisal fees and any penalties associated with your old mortgage.
• Your age and health: Your age and health can influence how long you plan to stay in your home and whether the refinancing costs are justifiable.
• Impact on retirement savings: If refinancing frees up funds that you redirect into your retirement accounts, it can enhance your financial security. Conversely, if closing costs, typically 2% to 5% of the new loan amount, dent retirement savings and the refinance reduces your ability to save, you may need to reconsider.
• Market conditions: Evaluate current market conditions and the direction of interest rates. Refinancing at a strategically beneficial time, for example, when rates are at a cyclical low, can maximize your long-term savings.

In closing, refinancing your mortgage as a retirement strategy might improve your financial affairs, but it requires careful consideration and planning. Analyze your personal financial goals and consult with financial advisors. Use this retirement planning calculator to assess your progress alongside your mortgage refinance decision. By integrating mortgage refinance strategies into your retirement planning checklist, you can secure a more financially stable and fulfilling retirement.

FAQs

Citations

• Nasrin Dalirazar, Marina Vornovytskyy, and David Hedengren (October 2010). Can Americans Afford to Retire?
• Rakesh Kochhar & Mohamad Moslimani (December 4, 2023). Wealth Surged in the Pandemic, but Debt Endures for Poorer Black and Hispanic Families. Pew Research.
• Social Security Administration (May 2024). Monthly Statistical Snapshot, April 2024.