Should you refinance your mortgage before retirement?

As the coronavirus pandemic continues to test the U.S. economy, the Federal Reserve has slashed mortgage interest rates to record lows in order to encourage as many borrowers as possible to invest in the housing market. With that in mind, depending on the specifics of your financial situation, it could be a good time for you to take your retirement plan a step further and access these low interest rates by doing a mortgage refinance (which can lead to lower rate and payment).

That said, refinancing may not be the best choice for everyone. If you’re retiring or are getting ready to do so in the near future, you may have to do a loan overview and mull over your loan options to decide if refinancing is the right fit. Read on below to learn how to determine if now is the time to refinance your home.

Factors to consider before refinancing

Low interest rates aside, there are four main ways in which choosing to refinance your mortgage will impact your finances. We’ve listed them below so that you can weigh the pros and cons before making the best decision for you.

1. The upfront cost

The first thing to consider is the upfront cost. Essentially, when you do a mortgage refinance, you’re taking out a new loan in order to pay off and replace your old one. However, most banks and lenders charge fees to close on the new loan, similar to how new mortgage borrowers pay closing costs when they close on a home.

If you’re thinking about taking out a new home loan to access the low mortgage refinance rates available on the market right now, it’s important to weigh if you can afford to pay these costs upfront and whether the cost negates the amount that you’d save on your mortgage.

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2. Your break-even point

In the event you can't afford to pay your closing costs upfront, most banks will let you wrap those fees into your new loan. At that point, you would need to find your break-even point -- or the point at which you will have paid off your closing costs and will begin to see true savings from refinancing your loan. Then, you’ll need to weigh that against your plan for the home.

For example, if it takes five years to pay off your closing costs, but you plan to sell the home in a similar timeframe, it may not be worth refinancing, despite the low rates. However, if you plan to stay in the home for an extended period of time, having access to record low refi rates might be worth it in the long run.

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3. The impact on your monthly budget

Next, think about the impact on your monthly budget. Interest rates aside, another way to lower your mortgage payment during a refinance is to stretch out the amount you currently owe on your home over a longer loan term. That said, if you decide to go this route, you’ll need to figure out if you’ll still be able to afford a mortgage payment when you’re ready to stop working.

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Alternatively, the other route people take when mortgage refinance rates are low is that they choose a shorter loan term to pay off their mortgage earlier. Of course, doing so often leads to a higher monthly mortgage payment, so you’ll need to make sure you have room for that in your budget.

You can use an online mortgage refinance calculator to estimate your new monthly costs.

4. Paying off your mortgage vs. building savings

The last factor to consider, especially if you’re thinking of using the record interest rates to pay down your loan faster, is whether you’re better off paying your mortgage or building up savings. This is usually a decision to be made with your financial advisor and will largely depend on how long you intend to stay in the home.

The bottom line

In the end, while low mortgage refi rates are available right now, refinancing may not be the best decision for everybody. Before you decide which option is best for you, it’s important to get a sense of what rates are available to you and how refinancing will impact your finances.

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