This is the first of a two part series in which I will explore the pros and cons of refinancing your mortgage before retirement. In this post, I’ll explore the Pros. Tomorrow I’ll illustrate the cons.
Last week while surfing the web I stumbled upon Reasons to Refinance Before You Retire. The article explains that since interest rates are so low, for some people it may make sense to refinance their mortgage just before retiring. That’s right, the advice of the article is to refinance your mortgage just before you’re probably going to take a major cut in your income.
I was ready to disregard the entire article before clicking on the link. The conventional thinking is to have your house paid in full before you even consider retiring. You could say that I drank the Kool-Aid when it comes to having a retirement free of mortgage payments.
The idea of having a mortgage free retirement is pretty engrained into my financial plan. In fact, I plan on knocking that sucker out as soon as it possible. So you can imagine how I felt when I stumbled upon this article. After finishing the title I was fuming and ready to completely disregard the article.
Then I realized that just because I don’t want to retire with a mortgage that doesn’t mean that everyone should. There are actually some scenarios where refinancing a mortgage before retirement can make sense, especially if you can receive an especially nice interest rate.
The Pros of Refinancing Before Retirement
When it comes to refinancing your mortgage before retirement it usually comes down to one of three reasons; lowering expenses, receiving a better return on your investment or liquidity.
Reducing Expenses
It’s entirely possible that your retirement may be quickly approaching. With the housing mess that we had during the last decade, it is also possible that you have more years left on your mortgage than you’re physically able to work. In circumstances like this, refinancing to receive lower payments may allow you to stretch your savings and social security.
If you’re able to work and considering refinancing to stretch your budget, then you should reconsider your plan. Medical expenses tend to increase as you age. If you’re finding yourself in a situation where you need to stretch your budget before you’ve retired, then you may find yourself entering the workforce again in a few years. Either way, it’s important to talk with a financial expert before considering these moves to find the best path for you.
Leverage
There is a school of thought that believes it’s a bad idea to have too much money tied up in an asset such as a house. Instead, it says the best route to wealth is to use money to create more money. Since mortgage rates are so low, people who follow this school of thought would consider refinancing the mortgage to and invest the savings. For example:
Donald believes that he can receive a 10% rate of return before taxes on his money. He can refinance his mortgage for 4% and will receive a tax deduction on his taxes. Although after taxes his return will be lower than 6%, Donald believes that the rate of return is worth not having his money tied up in his house.
To be honest, I’m having a very difficult time explaining pros of refinancing your mortgage before retirement. I would prefer to retire mortgage free. For some people though, refinancing before retirement may make sense. I gave these reasons to illustrate different paths people take to achieve financial freedom. I am not a financial expert, before you consider anything on this site, please consult a financial expert. In my next post I’ll give the cons to refinancing your mortgage before retirement.
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I didn’t read the article either…but I think that retiring without a mortgage would be ideal.
Holly@ClubThrifty recently posted..Our Credit Card Churning Plans for 2013
I also would prefer to retire without a mortgage. There’s too much risk while not working involved for me to feel comfortable.
I’m with you Holly. That’s my plan.
Great post! I too am of the persuasion that mortgage-free is the way to retire, but your post shows that there are occasionally situations where that may not be the best choice. Thanks for the educational info!
Laurie recently posted..Fire!
Sadly, our situations tend to dictate our options. That’s why I want to achieve financial independence, so that I can make the choices for what I want.
Well if you do have a mortgage for any reason at age 60, refinancing is better than nothing. You should refinance at any time you think you may get a better deal actually. A few months or couple of years before you leave the workforce makes sense since your paycheck is still high and you are employed, it may be more difficult once you are retired. I am semi retired and still have 28 years on a rental mortgage, I use the money as leverage and don’t mind the payment. Living in a paid for house is cool though.
Pauline recently posted..So the world didn’t end. Now, what?
I suppose it comes down to how much you need the money. If you have ample money sitting in a relatively “safe” investment that yields a decent rate then leveraging it could make sense.
That’s why I chose to look at both sides. Sometimes we don’t listen to ideas that conflict with ours. Therefore we automatically shut them down and this can keep us from growing. Although I think I’d prefer a paid off mortgage.
My friends parents have been retired for over 10 years (I met him in high school and have never known his parents when they were NOT retired). They have a mortgage on their house, even though they could easily pay it off if they wanted to. They have the cash freed up to invest and create more money, which they certainly are doing.
DC @ Young Adult Money recently posted..How to host a great Super Bowl Party on a Budget
Dc, this is why I wanted to show both sides. They prefer to allow their money to grow. Although, I’m curious as to what they would do if their investments tanked like the market did after the housing bubble. That would be my major fear. But I’m glad that it’s working for them and they can get the most out of their money.
I would tend to agree with you Justin. I would much prefer going into retirement mortgage free and debt free entirely as you’ll most likely be taking a significant income hit. That said, if being mortgage free is not a viable option then having a lower rate would be a benefit.
John S @ Frugal Rules recently posted..Festival of Frugality #373
I think you would have to be nuts to refinance before your retirement, something that my parents did and I get on them about it any time that I can. They know they made a mistake, but they wanted lower monthly payments, so they would be able to pay for the house. It was poor planning on their part.
I still struggle with this decision, Justin. I left my former career to work in non profit when I was 47 years. We had enough of my company stock to pay off the mortgage, but kept it invested. Our other investments are set aside for retirement, but the stock is only for paying off the house. I hesitate on selling the stock, paying capitol gains, and the paying off the mortgage. The tax benefit is minimal, but I feel the stock’s growth potential is better. This is still not an easy decision, should I just start paying any extra money we have towards the house? Yep, still a tough decision.
Susan Wilson recently posted..Know Your Commute Cost
I prefer the mortgage free goal, though realistically it’s a while away for me to say I’ll never have a mortgage. Of the two alternatives you list, I think the one regarding lowering payments is more palatable. I have heard the rate of return argument, in the second example, applied in other scenarios as well, and have never felt comfortable about it. There is the “sleep well at night” factor for some of us, and being mortgage-free would be better for that!
Squirrelers recently posted..If You Plan to Work Until Old Age, Change Your Plan
We looked into refinancing our mortgage to get access to lower interest rates, but the exit fees were ridiculous (like $30,000) and so we stayed where we started.
The government has recently changed the rules though so it may now be cheaper for us if we looked into it.
Glen @ Monster Piggy Bank recently posted..How Much Does it Cost to Have a Baby?
Like you I would be equally fuming after reading that article. As you move into retirement and give up what I consider your active income you put yourself at significant risk. As I’m sure you know the best way to mitigate those risks is to not only reduce your expenses but to reduce your liabilities as well. An expense is something that can reduced or even cut back in harsh times, while a liability cannot. Owning your home outright when you retire is a fundamental requirement for retirement in my book =)
Brick By Brick Investing | Marvin recently posted..How To Use Bear Put Spreads
Mitigating risk during retirement is very important. It would be terrible to wake up one day in your eighties and not have enough money to live on because you put your finances at risk.
Justin, I’m a big fan of money and I think if the individual is savvy enough, I would recommend the refinancing option. Having no mortgage is great but, the money goes nowhere and is held in your house until you sell it. I suggest taking the money and putting it into something that will grow, especially now when interest rates on mortgages are low, it’s not difficult to recoup that interest plus more!
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