The Case for Refinancing in Retirement When Mortgage Rates Drop

Mortgage rates, for the most part, have been falling since the start of the year . That's not necessarily enough to help first-time homebuyers enter the market, though, since housing prices are still considerably higher than they were a few years ago.

But if you already own a home, things are different. In that case, falling mortgage rates could open the door to refinancing. And that holds true whether you're retired or still working.

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Retirees need to think about refinancing a bit more carefully, though. It's not a bad idea, but there are pitfalls to consider.

The case for refinancing in retirement when mortgage rates fall

Refinancing in retirement offers a number of benefits. First, you can lower your monthly mortgage payments, which can free up money for other expenses.

A lot of retirees unfortunately don't manage to accumulate a lot of savings. If that's your situation, and you're living most on Social Security, you may be struggling to manage all of your expenses.

If you're able to cut your mortgage payments by refinancing, you should have more money for your remaining expenses, from food to utility bills to healthcare. The result? Less constant stress.

Furthermore, if you carried high-interest debt into retirement, falling mortgage rates could open the door to a cash-out refinance. This is different from a regular refinance.

With a standard mortgage refinance, you borrow the amount you owe on your existing home loan. With a cash-out refinance, you borrow more than your remaining mortgage balance. You can then use the extra funds for any purpose you want, whether it's home improvements or consolidating debt.

If you have expensive loans or credit card balances, rolling them into a cash-out refinance could reduce the overall rate on your debt, making it easier and less expensive to pay off.

Pitfalls you might encounter when refinancing in retirement

While refinancing your mortgage could make sense when rates are lower, there are a few important things to consider. First, you might reset the clock on your mortgage, thereby pushing off your payoff date. If your goal is to pay off your home in your lifetime, you'll need to be careful when refinancing.

Let's say you have a 30-year mortgage now, and you've been paying it off for 20 years already. If you're 65, there's a good chance you'll be able to whittle that loan down to $0 in your lifetime and be mortgage-free by 75. But if you take out a new 30-year mortgage at age 65, you may unfortunately pass away before that loan is paid off and never own your home outright.

That's not automatically a terrible thing. And rest assured that your heirs can inherit your home even if it's not paid off in full. It's just something to think about.

Secondly, there are closing costs involved when you refinance a mortgage that can eat into your savings. You'll need to make sure you intend to stay in your home long enough to reap a net benefit.

Let's say refinancing can save you $200 a month, but you'll pay $6,000 in closing costs. That means it'll take you 30 months to break even. If you're thinking of downsizing in a couple of years, refinancing may not be worth it.

Finally, you'll need to make sure you have enough income to qualify for a refinance. Social Security benefits count, as do retirement plan withdrawals. But if you're mostly living on Social Security, you may not have enough income to meet a lender's requirements.

Look at the big picture

There can be big benefits to refinancing in retirement when mortgage rates fall. Make sure to weigh the pros as well as the cons before making your decision.

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