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.
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.
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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