Best Ways to Save: September 2020

Best Ways to Save: September 2020

With Mortgage Rates So Low, Is Now a Good Time For Retired Homeowners To Refinance?

The coronavirus has caused a dramatic decline in home mortgage rates, but that doesn’t necessarily mean it’s a good time for everyone to refinance.  The good news is that, in many areas of the country, lenders and states are making the process safer for your physical health.  That said, refinancing in retirement is still a process that carries risk to your fiscal health.

To make things safer due to the coronavirus, lenders are transitioning to a virtual home mortgage process, and most areas are served by mobile notary services.  Currently, there are at least 26 states that allow some form of remote online notarizations.

Refinancing can be a good way to reduce your monthly mortgage payments but doing so generally means you extend the pay-off period of your loan and spend more money on interest up front.  Choosing a 15 - or even 10 - year loan can save you money on interest, but the monthly payments will be higher and potentially harder to sustain over time.

Either way, you will need to consider how well your income, including Social Security, retirement savings, pension (if any) and other income will allow you to sustain mortgage payments over the refinancing periods.  It’s also helpful to use realistic budget expenses.  That means estimating how taxes will reduce your Social Security and retirement income, and factoring in a realistic growth rate for medical expenses of at least 10% or more each year, to account for both rising prices and the greater need for services as we age.

The U.S. Bureau of Labor Statistics estimates that older households spend more than 46% of annual household budgets on housing.  That includes not only a mortgage, but also real estate taxes, homeowners’ insurance, maintenance and repairs, appliances and home furnishings, heating and cooling, electricity, water, and gas.  Many older homeowners often pay for landscaping and housekeeping services as well.

If you plan to cash out your home equity, it’s important to have a very clear idea of how that money will be used and how it would benefit your retirement plan.  For example, refinancing to do repairs and make improvements that add value and safety to your home benefit your retirement plan.  Taking money out for a vacation or to support adult children doesn’t offer any financial benefit to your retirement.

A question to ask yourself is how long you plan to stay in the home, and how many years remain on your current mortgage.  If your current mortgage only has 10 or 15 years left to go, refinancing is likely to result in higher lifetime interest costs.  When you get a new loan, most of the charges in the early years go towards interest costs.  But if you only have a few years left on your current loan, you have moved past that stage and are making progress toward paying off your loan balance.  If you refinance now, you start over from scratch.

If you are leaning towards refinancing your home, look carefully into the closing fees.  Will you be paying any closing costs out-of-pocket or will those costs get rolled into the loan?  How would that affect monthly payments?Based on your credit profile, what interest rate do you actually qualify for, and how does that compare with what you are currently paying?

Refinancing a mortgage in retirement is a “special needs” situation.  TSCL highly recommends that this should be discussed with an unbiased financial advisor.