Is Refinancing Before Retirement Wise?

When mortgage rates are low, refinancing is a natural choice for many homeowners seeking to reduce their monthly payments or shorten the term of their loan. Homeowners planning to retire within the next decade, however, must consider not only the short-term savings that refinancing can provide, but how committing to a long-term loan close to retirement will impact on their future financial stability.

When to Refinance Before Retirement

Most retirees don't prefer to have cumbersome monthly payments like the type a mortgage can present. However, if your mortgage payments will already stretch into your retirement years and refinancing will allow you to reduce your monthly payments so that you'll save money and have more expendable income during your retirement, you may be a good candidate for pre-retirement refinancing. If you can reduce the number of years on your mortgage while refinancing so that you'll be making mortgage payments for fewer years during your retirement, you should also consider making this change.

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Another justifiable time to refinance before retirement is if you'll be able to save enough money each month as a result of the refinance to save more towards your retirement. If you can save money that will be invested for retirement which will earn more passive income than you're paying in interest, refinancing before retirement may be entirely worthwhile.

If you really want to refinance close to your retirement, look for a new mortgage that will allow you to prepay with no (or low) prepayment penalty. With no prepayment penalty you can take advantage of the flexibility to pay off your loan before retirement if you desire, or to pay your debts early during your retirement if you find that you are able.

When Not to Refinance Before Retirement

Unless you're entirely sure that you'll have a stable retirement income that can support your living expenses and your loan payments, you should not consider taking on any loans that will stretch unnecessarily into your retirement years. Likewise, if you can save on your monthly payments in the present but will be required to extend the life of your loan when you refinance, you're increasing your chances that you'll die before meeting the end of the mortgage, thereby straddling your children or loved ones with an added financial burden.

It is also important to remember that while maintaining a mortgage during your working years often offers certain tax breaks, your tax bracket will likely be lower during your retirement years. Consequently, most retirees are in a lower tax bracket than they were during their earlier years, so the tax incentives from their mortgage payments are significantly lower, and are certainly not enough to justify stretching a mortgage into one's retirement years.

Although most financial planners would implore their clients to take caution before refinancing close to their retirement, there are some times when such a decision would be warranted. Before making a final conclusion, it's a good idea to explore all your options, consult with an experienced retirement planner and consider whether there are other ways to save money which would not require refinancing close to retirement.