Reasons to refinance before you retire

Ilyce R. Glink
Yahoo! Homes Contributor

If you’re retiring soon, this is the question you have to answer: Do I refinance before I retire, or continue to pay my current mortgage in retirement until I pay off my house?

While the answer varies based on your personal finances, a pre-retirement refinance is a great way to ensure you enter your golden years with your home loan financed at the lowest interest rates in history.

If you have the option to refinance, especially if your house is underwater (your house is worth less than the mortgage amount), you should go for it. And if you are able to refinance, there are some important reasons to do it before you leave the job market for good.

Lowering your monthly payment is one of the best ways to stretch your retirement budget. You’ll have more money to put toward discretionary expenses, and some of the cash you planned to use for mortgage payments can be reinvested into your retirement accounts or invested through non-qualified brokerage accounts.

You have a far better chance of qualifying for a refinance while you’re still gainfully employed. Among the things lenders want to see are your credit history, credit score and proof of income. Your income will likely drop once you retire, so the time to consider a refinance is before you leave the workforce.

If you refinance while you’re still 10 or 15 years away from retirement, today’s historic low interest rates mean you could enjoy your golden years debt-free. If you’re willing to refinance your mortgage into a shorter repayment term, you can coordinate your pay-off date with the date of your retirement. It could mean higher monthly payments, but the shorter loan term means long-term savings since you’re paying less in interest and more toward the principal of the loan.

I generally discourage people from refinancing a 30-year fixed-rate mortgage (FRM) into a new 30-year loan, especially when they’re 10 or more years into the original loan. While a longer loan term means lower monthly payments, it also means you’re paying more interest over the long run.

For example, if you’ve been in your home for 10 years of a 30-year loan and refinance into a new 30-year FRM, you will be paying for your home for 40 years. If you refinance into a 30-year FRM at age 50, you won’t have it paid off until age 80 – well into retirement. If you need a lower payment, then refinancing into the 30-year option is a smart move, and you should do it quickly, before interest rates rise.

But if income isn’t an issue, the mortgage payments you make for 15 years on a fixed income could easily offset any savings you see while you’re mortgaged and employed. And if you die before your loan is paid off, your heirs will be responsible for selling your home and paying back the bank or making your monthly mortgage payments.

If you’re nearing retirement and absolutely can’t afford the higher monthly payments of a shorter loan term, make sure you use your monthly savings wisely. Once you’ve locked in a lower interest rate for 30 years, put some of that savings into your retirement accounts each month while you’re still employed. When you can, try to pay more on your mortgage than is due in order to pay down your principal.

After you retire, try to avoid refinancing again unless you can lock in a shorter loan term and pay off your mortgage quickly. Continue making your monthly payments as scheduled, and don’t take out a reverse mortgage until you’ve paid off the bulk of the loan.

Ilyce Glink is an award-winning, nationally syndicated real estate columnist, blogger and radio talk show host, and managing editor of the Equifax Finance Blog. Follow her on Twitter @Glink.