Want to pay off your mortgage before you retire? Do this now
Written by
Contributor, Credible
Angela Brown is a student loan, personal finance, and real estate authority. Her work has been featured by Fox Business, LendingTree, FinanceBuzz, and Yahoo Finance.
Updated October 16, 2024, 2:46 AM EDT
The last year will go down in the record books for many reasons. Financially, consumers have seen record low-interest rates following the Federal Reserve’s efforts to boost the economy during the coronavirus pandemic.
At publication, the average 30-year fixed-rate mortgage is 2.71%, and the average for a 15-year fixed-rate mortgage is 2.26%, according to Freddie Mac. Rates have declined by nearly a full percentage since the same time last year.
These record-low interest rates continue to entice homeowners towards refinancing their current mortgages -- and with good reason. If you're hoping to pay off your mortgage before you retire, then you may want to consider refinancing your mortgage, too. Today's mortgage rates could potentially save homeowners thousands of dollars.
If you’re nearing retirement, you may wonder if refinancing your home could allow you to pay off your mortgage early. Here's what you need to do.
Refinance your mortgage today
If you’re nearing retirement age and you want to pay your home off early, the best way to do this could be to get a mortgage refinance at a record-low rate.
If you plan to stay in your home for the next several years and you’re comfortable maintaining the same monthly payments, refinancing your loan to a lower interest rate could save you money and help you pay your mortgage off faster.
HOW TO GET THE BEST MORTGAGE REFINANCE RATES
3 refinancing options to consider
Three key refinancing tactics could help you pay your home off quicker:
- Refinance to a lower interest rate
- Refinance to a fixed-rate loan
- Refinance to a shorter loan term
1. Refinance to a lower interest rate
With today's record-low mortgage rates, now is a good time to refinance — that is, if you can secure a lower interest rate than your current loan.
HOW REFINANCING YOUR MORTGAGE CAN PUT MONEY BACK IN YOUR POCKET
To help you understand how a mortgage refinance could potentially save you money, let’s look at an example:
On a $350,000 mortgage, a homebuyer opted for a 30-year fixed-rate mortgage at 6% (the average at this same time in 2005 was 6.28%).
Considering the above information, the homeowner would pay $2,098 per month and still have 15 years to pay off their remaining balance. By year 15, our example homeowner would still owe $248,670. If this homeowner takes advantage of record-low interest rates and refinances their mortgage into a 15-year loan at 2.3%, their new monthly payment would be $1,659 per month. That’s a savings of $439 per month.
If our homeowner simply made a second monthly payment with the $439 difference, they would spend the same amount of money each month but pay off their home faster. The extra $439 per month would total an additional $5,268 per year. This homeowner could save $11,484 in interest and pay their home off three years and seven months early.
2. Refinance to a fixed-rate loan
Even if you make no other changes, refinancing from a variable rate mortgage to a fixed-rate mortgage could save you money. The fixed-rate loan will allow you to lock in record-low rates, which could go up over the next several years.
WHAT ARE THE DIFFERENT MORTGAGE LOAN TYPES AVAILABLE?
3. Refinance to a shorter loan term
Refinancing to a shorter-term loan could qualify you for lower interest rates. While your monthly payments could go up, a shorter loan naturally allows for quicker repayment.
If you’re nearing retirement, now may be the best time to refinance because you can still use your current income for your new loan.
4 THINGS TO CONSIDER IF YOU'RE PLANNING TO REFINANCE CLOSE TO RETIREMENT
During your research, make sure to use an online mortgage refinance calculator to determine potential new monthly costs.
Just note: As of Dec. 1, 2020, all home refinances over $125,000 are subject to a 0.5% adverse market fee. The Federal Housing Finance Agency announced the adverse market fee in August. The FHFA said the fee would help offset projected losses caused by COVID-19. Additionally, most lenders charge an additional 1% in fees.
Other ways to pay your home off early
As a retiree, paying your home off is a great way to reduce your monthly expenses so you can enjoy your retirement more fully. In addition to refinancing your current loan into a lower interest rate mortgage, there are two other ways to pay your mortgage off quickly.
- Make biweekly payments
- Make lump-sum payments
1. Make biweekly payments: Consider splitting your mortgage payment in half and paying one half every two weeks. Bi-weekly payments help you reduce your balance quicker, which allows you to save more in interest. You could pay your mortgage several years faster with this method.
2. Make lump-sum payments: When you can, make lump sum payments towards the loan balance. When you make your additional payments, specify that the payment is for the principal, not the interest. Consider using holiday gift money, tax returns, or investment returns to make lump-sum payments.
WHY IT'S A GOOD IDEA TO REFINANCE YOUR MORTGAGE WHILE RATES ARE LOW