The Right Way for Retirees to Use a Lower Mortgage Rate in Their Financial Plan

If you've been paying attention to mortgage rates, you may be aware that they're a bit lower these days than they were late last year. For prospective homebuyers, that's great news.

But lower mortgage rates could benefit retirees, too. Here are a few ways you can use them as part of your financial plan.

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1. Consider a refinance

Lower mortgage rates could open the door to a mortgage refinance. And that could make your mortgage payments more affordable.

A lot of retirees live on a fixed income of Social Security and, if they're lucky, modest savings. If you've been struggling to cover your costs, a mortgage refinance could free up room in your budget for other expenses.

Of course, for refinancing to make sense, you need to make sure of a couple of things. First, you need to make sure that the mortgage rate you can get today is considerably lower than your current one (ideally, at least one full percentage point lower or more).

Second, you need to make sure you plan to stay in your home long enough to come out ahead financially in a refinance. That's because you'll be charged closing costs to put that new loan in place.

The best thing to do is see how much you'll pay in closing costs, figure out your potential monthly savings, and then see what your breakeven point looks like.

If you're looking at $5,000 in closing costs and expect to save $200 a month on your mortgage payments by refinancing, your breakeven point is 25 months. If you plan to stay in your home at least that long, then refinancing could make financial sense. If you think you might move within two years, it doesn't pay.

Either way, before you start comparing refinance mortgage rates, check your credit. The higher your score, the more competitive a mortgage rate you might qualify for. But if your credit isn't so great, you may not get the best rate on a refinance, even if rates are lower overall.

2. Look at downsizing

If you're retired, you may no longer need the same amount of space at home you once did. Downsizing could save you money on everything from utilities to upkeep.

If you've been waiting for mortgage rates to drop so you can downsize, now may be a good time. But you may also want to wait a bit and see if rates come down some more.

If you're going to take advantage of today's mortgage rates by downsizing, make sure you understand the total cost of moving. Between potential storage fees and HOA dues, it's important to make sure you'll actually save money on housing in a smaller home -- because that's not actually a given.

3. Take advantage of a low rate you already have

If you already have a pretty low interest rate on your mortgage, today's rates may be higher than the one you've already locked in. But you can still use that lower mortgage rate to your advantage.

A lot of people rush to pay off their homes ahead of retirement or early on in retirement so they no longer have any debt. But with a low enough mortgage rate, that debt could be benefiting you financially.

By carrying a mortgage, you free up money for other things and maintain better liquidity. At a time when you're not working, that's important.

Also, if you're thinking of dipping into your retirement savings to pay off your mortgage, you may want to reconsider if your current rate is low enough. You may be able to earn a higher return in your IRA or 401(k) than what you can pay on your mortgage.

For example, if you have a 3% mortgage because you signed your loan back when rates fell a few years ago, and you owe $80,000 on your home, it could make sense to keep paying that mortgage rather than take an $80,000 withdrawal from your IRA or 401(k) plan. That way, you're not tying up as much money in your home at once. And your IRA or 401(k), if invested strategically, might easily generate a return above 3%.

Lower mortgage rates could be beneficial to you in different ways. Think about your needs and goals when deciding how to take advantage of them as a retiree.

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