Refinancing your mortgage close to retirement? 4 things to consider

People who are planning to retire soon and have a mortgage with a higher interest rate should consider a number of factors before they refinance such as the length of time they plan on living in the home and how it will impact their new budget.

Retirees often live on a fixed budget that consists of money saved in various retirement accounts and Social Security.

Before refinancing a mortgage, homeowners who are planning to retire in the next year or two should consider these factors:

1. Affordable loan payment
2. Costs of refinancing
3. Refinance with the same lender
4. Keeping cash on hand

1. Affordable loan payment

Retirees should determine how much their new monthly mortgage payments (along with taxes and insurance) will be in the future before refinancing,. Property taxes and home insurance also rise over time.

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Retirees should also consider their future financial situation and healthcare needs to determine if obtaining another 30-year loan makes more sense compared to a 15-year loan in terms of monthly payments. While a 15-year mortgage has lower costs, in the long run, homeowners will have to shell out a higher payment each month.

“Ensure that you are staying in your home long enough to break even on refinancing fees before making a decision,” said Leslie Tayne, a Melville, N.Y. attorney specializing in debt.

A retiree might consider a longer loan term and make extra payments to shorten the time frame for a payoff as long as it works with their new budget, she said.

Today's refinance rates

• Average 15-year refinance mortgage: 2.65%
• Average 30-year refinance mortgage: 3.14%.

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2. Costs of refinancing

Closing costs usually consist of 2% to 5% of the amount of the mortgage loan. While most mortgage lenders include these fees in a refinance mortgage, consider whether it's worth it to spend thousands of dollars once you are retired and living on a fixed income.

Plan on spending $5,000-$10,000 to refinance, but that amount varies, Tayne said.

“Many banks allow consumers to include these costs into the new loan and that can mean taking out a larger loan than before and cutting into equity,” she said. “Applicants should keep their loan-to-value (LTV) ratio in mind to see how including these costs would work with their income.”

Consider whether the house is affordable after you retire, especially if your budget is limited, Tayne said. Keeping your current home may not fit in with your new budget, even with a refinance.

“The consideration may be to reduce housing expenses by selling the house,” she said.

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3. Refinance with the same lender

Consider refinancing with the same lender because you could likely save money on some of the costs. Some lenders are willing to waive fees such as the appraisal or the application fee for current borrowers. Shop around before you make a decision since lenders are changing their options frequently.

“You may want to consider refinancing with the bank you already have the loan with, instead of looking to other lenders, which could result in lower costs,” said Tayne.

If you have an estimate of your closing costs, use an online mortgage refinance calculator to determine the new monthly costs.

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4. Keeping cash on hand

Not pouring a large portion of your money into your house can be a wise move once you retire, said Daren Blonski, managing principal of Sonoma Wealth Advisors in California. Since the amount of your disposable income decreases once you stop working, having additional cash on hand for home improvements, medical costs, traveling, or other expenses instead of making extra mortgage payments can be a good idea.

“Tying up all your money in a home is not a good idea, especially if you have not saved up adequately for retirement,” he said. “If you have saved up enough money for retirement, you can put your extra cash into a CD or short-term bond ETF such as the JPMorgan Ultra-Short Income ETF (JPST),” he said.

Homeowners are often lulled into a false sense of security once a house is paid off because they still need to budget for property taxes, insurance, and maintenance costs.

Keeping your costs low when you are on a fixed income is important for retirees. Refinancing can lower your monthly payments. Shopping around for current mortgage rates can help you decide if refinancing is a good fit for you and your financial situation.

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