In many ways, the conventional wisdom that has long governed retirement is changing. The age at which people leave the workplace is becoming more flexible, and workers are also beginning to plan for retirement at a younger age. Other factors are also influencing retirement, especially as more people are waiting until later in life to buy their first home. This means many of these new homeowners may not have their mortgage paid off before they retire.
As CNBC reported, homeowners have long been cautioned to pay off their mortgage before entering retirement. However, such one-size-fits-all wisdom may not hold true anymore, especially in the face of falling mortgage rates. Speaking with the news outlet, Diahann Lassus, president of wealth management firm Lassus Wherley, noted low interest rates may make refinancing a mortgage for a longer term a smart solution for retirees. Taking advantage of these historically low rates allows for a reduction in the monthly payment, which can help with budgeting during the transition out of the workforce.
Lassus advised the savings for the reduced mortgage payment could be reinvested in a retirement plan, such as a 401K. Extending the mortgage through refinancing also has the added advantage of allowing homeowners to continue to write off their mortgage interest during tax season.
“What you can do is invest those dollars, [and] your earnings could be significantly higher, which means you’re using someone else’s money to earn more so that you’re able to build your retirement assets over time,” Lassus told CNBC. “And that tax deduction makes it even more cost-effective.”
As WiseBread noted, the decision to refinance a home is complex and homeowners need to consider many factors. For one, if you’re trying to sell your home in the next few years, refinancing might not be worth it. Refinancing does involve additional costs, including fees associated with applications, inspections, title search and attorney review, which could negate the monthly savings of a lower mortgage if you’re planning to sell in a couple years.
According to Bankrate, one simple way to decide if refinancing makes sense for your situation is to calculate the break-even point, or the time it takes for the refinance to pay for itself. This is determined by dividing the total closing cost by the monthly savings. For example, if the closing costs are $2,400 and the refinancing lowers your monthly payments by $100, it would take you 24 months to break even on the fees. Unless you plan to sell the home before the break-even point, refinancing may improve your monthly budget and give you more financial freedom.
At The Federal Savings Bank, we understand the importance of sound financial planning in all stages of your life. If you are entering or nearing retirement, speak with us today about whether mortgage refinancing is right for you.
By Shaun Meller