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When mortgage rates are low, what should retirees consider?

by Maurice Draine | Contributor
Nov 23, 2020

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With mortgage rates at record lows, many Americans wonder if this is the right time to refinance. Many of those thinking about refinancing their homes include retirees looking for more ways to increase their finances during their retirement years. Is this the right option for older homeowners? The answer is not that simple. That’s because there are several things to consider when it comes to refinancing your home, even when rates are historically low.

How low are today’s mortgage rates?

For a 30-year fixed-rate mortgage, the average rate fell below 3.15% in March 2020. By October 2020, it was 3.04%. When compared to where the rate was in 2018 at 4.5%, it is easy to see why so many people are interested in refinancing. But retirees have a lot to think about when it comes to changing their rate.

Those who have been paying on their homes for many years may not want to switch to a lower mortgage payment because it will add more years to their payoff date. However, the difference between 4.5% interest and where the rates are currently is substantial and could end up saving homeowners hundreds of dollars each month.

Is refinancing to access home equity a good idea for retirees?

Retired homeowners with plenty of equity can quickly lower their mortgage rate with a cash-out refinance. This option has become extremely popular in recent years and allows you to access a lump sum of cash that could be especially useful if money is tight. The thing to remember about cash-out refinancing is that you will end up with a brand-new mortgage, one that is likely to have a much lower interest rate. Therefore, it is crucial to weigh the pros and cons of refinancing and decide which option is best for you.

The benefits of refinancing your home during retirement

Your home is a significant investment that you can use during your retirement years to help you reach your financial goals. But refinancing is not always the best option for every homeowner. Here are a few benefits that all retirees should think about if they are considering refinancing their mortgage to get a lower rate.

You can save money each month

The apparent benefit of refinancing your mortgage while rates are historically low is that you could save hundreds of dollars each month. That money could go into savings and help out a great deal, mostly if you could not save as much for retirement as you had hoped. Refinancing your loan can help to decrease the stress on your budget. But at the same time, you will be extending your payment term. That could be a negative aspect if you have already paid for your home for many years.

Graph of Retiree Medical Costs Rising over time

Have additional cash to help with health care costs

When saving for retirement, it can be challenging to determine precisely how much money you will need to put back for health care. The cost of insurance premiums can change from one year to the next, and if you develop any new health conditions, your cost for medical care and prescriptions will go up as well. In 2019, it was estimated that a couple would pay $285,000 for health care costs during the entirety of their retirement years. Spending less on your mortgage each month can help put more money back in your pocket that you could use to help cover your medical costs.

Here are 4 issues to consider when thinking about refinancing

Refinancing your mortgage after you have reached your retirement years is something that you shouldn’t rush into. That is a decision that requires a lot of thought and planning before any paperwork is signed. Here are a few things you should keep in mind if you are thinking about refinancing your home to take advantage of low rates.

  1. Be clear about how the money will be used
  2. When considering a new mortgage, it is good to plan out how you will use the money. How will this extra cash benefit your over financial plans during your retirement years? Will it help to cover health care costs? Will you use it to go on vacation or purchase an RV for traveling? Or do you plan to use it as a safety net for financial emergencies? Having a plan in place for the money you get from your new home loan will help put things into perspective and make it easier for you to decide if this is the right move or not.

  3. Can you afford to take out a new 15- or 30-year mortgage?
  4. Having a lower monthly payment is a great advantage, but will you be able to afford to make that payment for the next 15, 20 or 30 years? If you commit to a home loan after you have reached retirement age, you could end up leaving behind debt for your heirs to pay off. Before you decide to go from a 15-year mortgage to a 30-year mortgage, you need to be sure your retirement savings, Social Security payments and additional forms of income will cover the cost of your new mortgage payment in the years to come.

  5. Should you refinance with a shorter loan term?
  6. Choosing to refinance with a shorter loan term has its advantages and disadvantages. While you will likely be paying out more each month on your mortgage, you have the peace of mind knowing it will be paid for in less time. If you were already stuck in a 30-year mortgage with around 20 years to go, choosing a 15-year loan can help. But you still must think about how useful the shorter term will be for your retirement budget.

  7. Should retirees lower their interest rate?
  8. There are many benefits for retirees who want to take advantage of the current low-interest rates. Choosing to refinance your home at this time can help you put more money back into your retirement savings. That money can be used to cover the cost of various expenses or help pay for something you and your spouse can enjoy, such as a family vacation. While the lower monthly payment is a plus, it is essential to consider how adding more years to your current mortgage will affect your financial future.

Alliance America can help

Alliance America is an insurance and financial services company. Our financial professionals can assist you in maximizing your retirement resources and achieving your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.

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