- Should You Pay Off Your Mortgage Early, Before You Retire?
- A middle ground
- Should I refinance before I retire?
- Retirement lifestyle
- Refinance into a shorter-term loan
- Extending your mortgage term
- Is refinancing worth it?
- Should you refinance your mortgage before retirement?
- Factors to consider before refinancing
- 1. The upfront cost
- 2. Your break-even point
- 3. The impact on your monthly budget
- 4. Paying off your mortgage vs. building savings
- The bottom line
- Should You Pay Off Your Mortgage Before You Retire?
- Why a mortgage-free retirement is usually best
- Don't make yourself poorer
- When a payoff isn't possible, minimize the mortgage
- Should you do a cash-out refinance before retirement? | Mortgage Rates, Mortgage News and Strategy
- Cash-out refinance pros
- Cash-out refinance cons
- Other drawbacks
Should You Pay Off Your Mortgage Early, Before You Retire?
Some people enjoy the peace of mind that comes with a debt-free retirement. But warm and fuzzy feelings should be weighed against solid financial facts.
When it comes to paying off your mortgage, for example, first take a look at the interest rate.
“If the rate on your mortgage is low, you might be better off holding onto your cash—or even investing it, assuming you’re reasonably confident you can get a higher rate of return than you’re paying on the loan,” says Rob Williams, vice president of financial planning at the Schwab Center for Financial Research. “But, at the same time, reducing debt, and ideally eliminating it, all else equal, should be on your list of goals before retirement.”
With interest rates are at a record low, including sub-3% mortgage rates, it may be tempting to refinance a mortgage or not pay it off.
But it’s worth keeping in mind, that it's hard to get a 3% guaranteed investment return from any investment today. Being “reasonable confident” you get a higher rate of return involves risk.
It’s important to evaluate your risk tolerance before making a decision.
Here are the pros and cons to consider before retiring a home loan.
- Limited income: Your monthly mortgage payment may represent a significant chunk of your expenses. Eliminating it can greatly reduce the amount of cash required to meet monthly expenses.
- Interest savings: Depending on its size and term, a home loan can cost thousands or even tens of thousands of dollars over the long haul. Paying off your mortgage early frees up that future money for other uses. While it’s true you may lose the mortgage interest tax deduction, the savings on servicing the debt can still be substantial. Besides, the closer you get to paying off the loan, the more of each monthly payment goes to principal, decreasing the amount you can deduct.
- Predictable return: Investments can go up—and they can go down. But no longer paying interest on a loan can be earning a risk-free return equivalent to the mortgage interest rate. Being relatively confident of earning a return that exceeds the mortgage rate is not the same thing as being certain of earning that rate. There's a risk of loss too.
- Peace of mind: Numbers aren’t everything, so if you’re determined to retire your mortgage, consider tapping taxable accounts first. “If you withdraw money from a 401(k) or an individual retirement account (IRA) before 59½, you’ll ly pay ordinary income tax—plus a penalty—substantially offsetting any savings on your mortgage interest,” Rob says.
- Insufficient retirement savings: If you aren’t contributing enough to your 401(k), IRA or other retirement accounts, this should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
- Insufficient cash reserves: Rob recommends keeping a cash reserve of three to six months’ worth of living expenses in case of emergency. “You don’t want to end up house rich and cash poor by paying off your home loan at the expense of your reserves,” Rob says.
- Higher-interest debt: Before you pay off your mortgage, first retire any higher-interest loans—especially nondeductible debt that from credit cards.
- Opportunity costs: One way to determine if investing the funds is preferable to paying off your mortgage is to compare your mortgage interest rate to the after-tax rate of return on a low-risk investment with a similar term—such as a high-quality, tax-free municipal bond (assuming the issuer is from your home state. You may have to pay taxes on out-of-state municipal bonds). If your mortgage is costing you less than you’d earn, you might consider keeping it.
- Diversifying your investments: Maintaining your mortgage allows you to hold more of other asset classes. And overconcentration carries its own risks—even when it’s in something as historically stable as a home.
A middle ground
If your mortgage has no prepayment penalty, an alternative to paying it off entirely is to chip away at the principal. You can do this by making an extra principal payment each month or by sending in a partial lump sum.
This tactic can save a significant amount of interest and shorten the life of the loan while maintaining diversification and liquidity. But avoid being too aggressive about it—lest you compromise your other saving and spending priorities.
You could also consider refinancing. Current interest rates are relatively low, and depending on the type of loan you have, refinancing might make sense for you.
If this is something you’re interested in pursuing, make sure you do a thorough cost-benefit analysis before pulling the trigger. If you refinance, though, avoid the temptation to take out more equity, or increase your debt.
The goal, ideally, should be to reduce debt on your primary home over time—not increase it.
Should I refinance before I retire?
If you are age 55 or older and plan to retire in a decade or so, you need to evaluate your retirement funds and your desire to pay off your mortgage before signing that refinance application.
Financial planners have mixed feelings about whether homeowners should retire their mortgages before retirement.
“First, you need to think realistically about what you want your lifestyle to be in retirement,” says Dennis McMurray, a financial adviser and principal with Bridge Wealth Management Group in Rancho Santa Margarita, California. “Do you want to stay in your home and pass it on to your heirs or do you want to sell it and downsize? Even if you are thinking of moving, maybe you want to keep it and use the property for rental income in retirement.”
If you plan to sell your home within the next few years, a refinance may not make sense because you won't have time to recoup your costs.
McMurray says that while the perfect situation would be to enter retirement with plenty of savings and no debt, that's not always realistic for everyone. He says eliminating a mortgage payment before retirement can improve cash flow.
“The number one fear of people contemplating retirement is the fear of running money,” says McMurray. “If you run through your savings and still have a mortgage, you'll be hitting a higher hurdle than someone without a mortgage.”
Jude Boudreaux, a Certified Financial Planner and founder of Upperline Financial Planning in New Orleans, says that paying off your mortgage before you retire not only gives you flexibility, but also decreases the amount of money you need to fund your retirement.
However, if you are currently paying $500 or more extra every month to retire your mortgage early, you may be better off investing that money, says Joseph Adkins, CEO of Global Asset Management Group in Altamonte Springs, Florida.
“In fact, low mortgage rates give you more reason not to pay off your house because you can keep your housing payments low and may be able to get a tax deduction for the interest you pay,” says Adkins.
It's worth considering that accelerating the pay off of your home — creating more home equity at the expense of retaining or improving your financial liquidity — can be costly, too.
Should you need access to funds you've locked up in your home, you may need to take on new debt and incur monthly payments and interest cost to do so.
Money in investments or savings may be more liquid and simpler or less costly to access.
Refinance into a shorter-term loan
If you are getting closer to retirement age, your natural inclination may be to refinance into a shorter-term loan in order to pay off your mortgage faster. But before you do that, there are some things to keep in mind depending on your individual circumstances.
“You should look for a lender who will offer you a loan for 10 years or even a specific term such as 11 or 12 years that matches the year you intend to retire,” says Boudreaux. “But be careful to do the math and find the break-even point to determine how much you will really save. If it takes too long to recover your closing costs and transaction fees, it may not be worth it.”
If you can't match the specific number of years before retirement with a new mortgage's term, you can make prepayments to make this happen. Use HSH's target=”_blank”>It's My Term prepayment calculator to find out the exact prepayment you'll need to perfectly hit your time goal.
Adkins says it rarely makes sense to refinance into a shorter-term loan for borrowers who don't have a lot of retirement savings because the higher monthly payments on a shorter loan term could further reduce the borrower's ability to save.
Extending your mortgage term
Some borrowers may want to switch to a new 30-year fixed-rate home loan in order to reduce their monthly payments.
“If you intend to invest the extra savings for your retirement, this could be a good move, especially if you use the investment to pay off your mortgage in full at a later date,” says Adkins.
Boudreaux says borrowers should be wary of extending their mortgage into a new long-term loan because even with the lower interest rate, they will pay more in interest over the life of the loan.
However, he says borrowers could take advantage of lower interest rates if they refinance and then continue to pay the higher mortgage payment of their current loan.
This is known as a “refinance-and-prepay” strategy.
“You'll have the benefit of the lower interest rate and you'll pay off your mortgage quicker if you keep making the payments you were used to,” says Boudreaux.
“You also have the flexibility of the lower minimum required payments so if something happens and you need to cut back, you'll still be able to afford your loan.
You won't be locked into the higher payment that is required on a shorter-term loan.”
Is refinancing worth it?
Boudreaux says that if you are just a few years away from paying off your mortgage, the cost of refinancing could quickly eat up any savings. He says homeowners should avoid paying points to reduce their interest rate.
In a common refinance scenario where the borrower pays no closing costs pocket, paying points will increase the amount of the loan or increase the interest rate a bit, and will extend the time until borrowers reach the break-even point when savings surpass the cost of refinancing.
Knowing when (or if) your refinance will save you money can help you to decide if a refinance is worth it in your situation. HSH's “Should I Refinance My Mortgage? Calculator can give you an accurate reading of when the interest savings from you new loan will overcome the cost — and when your real savings from your refinance will actually begin.
“You should refinance only if you can significantly reduce your monthly payments and will invest those savings to generate future retirement income,” says Adkins. “If you lack the discipline to save for retirement, a shorter-term loan might be a better option because it works as a forced savings plan and will build your home equity faster.”
Confused as to how you should pay for your refinance? Is it better to pay closing costs pocket, finance them into the loan amount, or trade them for a higher interest rate? HSH.com’s “Tri-Refi” Refinance Calculator allows you to run the numbers to decide which is best for you. Fill in the information once and instantly compare the costs and savings of each method of refinancing.
Whether it's worth it or not to refinance — and to what new term, and paying fees to refinance or not — can depend on a number of factors: How much time remains on your existing mortgage, the size of the loan you'll be refinancing, your cash-flow situation now and what it is expected after you retire, what your current income and debt-load will allow you to qualify to borrow, whether you have cash available to spend on closing costs and more. How much equity you already have in your home can also come into consideration, too.
As just one example of these intersections, it may be that you have 20 years remaining on an existing 30-year term, and want to refinance to a new 10-year term to match a retirement timeline.
However, even with a much lower rate than your existing loan, your monthly payment will rise, and today's underwriting standards, you income might not allow you to qualify for the increase in payment.
Another might be a situation where, even if you could cover a higher monthly payment that a new 30-year term, with a lower rate and lower monthly payment might allow you to improve your cash flow, allowing for the faster pay down of other high-rate debt before retirement or fresh funds to plow into investments or your retirement account.
One other item to consider, most particularly if you are 62 years old or older and considering refinancing your mortgage is that a HECM or reverse mortgage could be a way to eliminate mortgage payments completely in retirement. This could factor into your decision to refinance or not, whether to take a longer or shorter term and more.
Should you refinance your mortgage before retirement?
As the coronavirus pandemic continues to test the U.S. economy, the Federal Reserve has slashed mortgage interest rates to record lows in order to encourage as many borrowers as possible to invest in the housing market.
With that in mind, depending on the specifics of your financial situation, it could be a good time for you to take your retirement plan a step further and access these low interest rates by doing a mortgage refinance (which can lead to lower rate and payment).
Before you refinance your current loan, make sure you use an online marketplace Credible to compare multiple lenders and view current refinance rates.
That said, refinancing may not be the best choice for everyone. If you’re retiring or are getting ready to do so in the near future, you may have to do a loan overview and mull over your loan options to decide if refinancing is the right fit. Read on below to learn how to determine if now is the time to refinance your home.
Factors to consider before refinancing
Low interest rates aside, there are four main ways in which choosing to refinance your mortgage will impact your finances. We’ve listed them below so that you can weigh the pros and cons before making the best decision for you.
1. The upfront cost
The first thing to consider is the upfront cost. Essentially, when you do a mortgage refinance, you’re taking out a new loan in order to pay off and replace your old one. However, most banks and lenders charge fees to close on the new loan, similar to how new mortgage borrowers pay closing costs when they close on a home.
If you’re thinking about taking out a new home loan to access the low mortgage refinance rates available on the market right now, it’s important to weigh if you can afford to pay these costs upfront and whether the cost negates the amount that you’d save on your mortgage.
In order to make your decision, the best thing to do is ask your lender for a loan estimate, which will give you a breakdown of what costs you can expect to pay for the new loan. Credible can introduce you to multiple mortgage refinance lenders at once, so you can compare deals and find out what kind of rates you qualify for instantly.
EVERYTHING YOU NEED TO KNOW ABOUT MORTGAGE REFINANCE
2. Your break-even point
In the event you can't afford to pay your closing costs upfront, most banks will let you wrap those fees into your new loan. At that point, you would need to find your break-even point — or the point at which you will have paid off your closing costs and will begin to see true savings from refinancing your loan. Then, you’ll need to weigh that against your plan for the home.
For example, if it takes five years to pay off your closing costs, but you plan to sell the home in a similar timeframe, it may not be worth refinancing, despite the low rates. However, if you plan to stay in the home for an extended period of time, having access to record low refi rates might be worth it in the long run.
HOW TO REFINANCE YOUR MORTGAGE
3. The impact on your monthly budget
Next, think about the impact on your monthly budget. Interest rates aside, another way to lower your mortgage payment during a refinance is to stretch out the amount you currently owe on your home over a longer loan term. That said, if you decide to go this route, you’ll need to figure out if you’ll still be able to afford a mortgage payment when you’re ready to stop working.
You can visit Credible to compare mortgage lenders and save money with a lower monthly payment.
WHAT IS CASH-OUT REFINANCE AND HOW DOES IT WORK?
Alternatively, the other route people take when mortgage refinance rates are low is that they choose a shorter loan term to pay off their mortgage earlier. Of course, doing so often leads to a higher monthly mortgage payment, so you’ll need to make sure you have room for that in your budget.
You can useanonline mortgage refinance calculator to estimate your new monthly costs.
4. Paying off your mortgage vs. building savings
The last factor to consider, especially if you’re thinking of using the record interest rates to pay down your loan faster, is whether you’re better off paying your mortgage or building up savings. This is usually a decision to be made with your financial advisor and will largely depend on how long you intend to stay in the home.
The bottom line
In the end, while low mortgage refi rates are available right now, refinancing may not be the best decision for everybody. Before you decide which option is best for you, it’s important to get a sense of what rates are available to you and how refinancing will impact your finances.
If you are still unsure, you can visit an online marketplace Credible to get in touch with experienced loan officers and get your mortgage questions answered.
WHEN SHOULD YOU REFINANCE YOUR MORTGAGE?
Should You Pay Off Your Mortgage Before You Retire?
Most people would be better off not having mortgages in retirement. Relatively few will get any tax benefit from this debt, and the payments can get more difficult to manage on fixed incomes.
But retiring a mortgage before you retire isn’t always possible. Financial planners recommend creating a Plan B to ensure you don’t wind up house rich and cash poor.
Why a mortgage-free retirement is usually best
Mortgage interest is technically tax deductible, but taxpayers must itemize to get the break. Fewer do that since Congress nearly doubled the standard deduction in 2017. The IRS reported that 13.9 million tax returns claimed the mortgage interest deduction in 2018, compared to nearly 34 million in 2017.
Even before tax reform, people approaching retirement often got less benefit from their mortgages over time as payments switched from being mostly interest to being mostly principal.
To cover mortgage payments, retirees frequently have to withdraw more from their retirement funds than they would if the mortgage were paid off. Those withdrawals typically trigger more taxes, while reducing the pool of money that retirees have to live on.
That’s why many financial planners recommend their clients pay down mortgages while still working so that they’re debt-free when they retire.
Increasingly, though, people retire owing money on their homes. The Federal Reserve’s Survey of Consumer Finances found that 37.6% of households headed by people age 65 to 74 had a mortgage on their primary residence in 2019. So did 27.7% of those 75 and older. In 1989, the proportions were 21.7% percent and 6.3% percent, respectively.
But rushing to pay off those mortgages may not be a good idea, either.
Don't make yourself poorer
Some people have enough money in savings, investments or retirement funds to pay off their loans. But many would have to take a sizable chunk of those assets, which could leave them short of cash for emergencies or future living expenses.
“While there are certainly psychological benefits related to being mortgage-free, financially, it is one of the last places I would direct a client to pay off early,” says certified financial planner Michael Ciccone of Summit, New Jersey.
Such big withdrawals also can shove people into much higher tax brackets and trigger whopping tax bills. When a client is wealthy enough to pay off a mortgage and wants to do so, CFP Chris Chen of Newton, Massachusetts, still recommends spreading the payments over time to keep the taxes down.
Often, though, people in the best position to pay off mortgages may decide not to do so because they can get a better return on their money elsewhere, planners say. Also, they’re often the ones affluent enough to have big mortgages that still qualify for tax deductions.
“Mortgages many times have cheap interest rates that are deductible and thus may not be worth paying off if your portfolio after taxes can outpace it,” says CFP Scott A. Bishop of Houston.
When a payoff isn't possible, minimize the mortgage
For many in retirement, paying off the house simply isn’t possible.
“The best case ‘wishful thinking’ scenario is that they'll have a cash windfall via an inheritance or the that can be used to pay off the debt,” says CFP Rebecca L. Kennedy of Denver.
In pricey Los Angeles, CFP David Rae suggests mortgage-burdened clients refinance before they retire to lower their payments. (Refinancing is generally easier before retirement than after.)
“Refinancing can spread your remaining mortgage balance out over 30 years, greatly reducing the portion of your budget it eats up,” says Rae, whose office is in West Hollywood.
Those who have substantial equity built up in their homes could consider a reverse mortgage, planners say. These loans can be used to pay off the existing mortgage, but no payments are required and the reverse mortgage doesn’t have to be paid off until the owner sells, moves out or dies.
Another solution: downsize to eliminate or at least reduce mortgage debt. CFP Kristin C. Sullivan, also of Denver, encourages her clients to consider this option.
“Don't fool yourself that your grown kids will be back visiting all the time,” Sullivan says. “Certainly don't keep enough space and comfort for them to move back in with you!”
This article was written by NerdWallet and was originally published by The Associated Press.
Should you do a cash-out refinance before retirement? | Mortgage Rates, Mortgage News and Strategy
In this article:
- What can you accomplish with a cash-out refinance before retirement?
- How can it help your financial position?
- What are the drawbacks?
most mortgage products, the cash-out refinance is not good or bad. It’s either appropriate or not. Here’s how to decide if a cash-out refinance before retirement is a good strategy.
Verify your new rate (Mar 25th, 2021)
Own a home in your fifties or older and still have a mortgage? Maybe you should consider a cash-out refinance before retirement. This option could offer some flexibility:
- Use the extra money to invest in your retirement savings, make a large purchase, or remodel your house
- You may pay less if you opt for an adjustable rate mortgage and plan to move soon
- It can enable you to pay down other high-interest debt and streamline all home loan payments
Related: Best uses for a cash-out refinance
This strategy has its drawbacks, too. You’ll be retiring with extra debt. The costs may outweigh the benefits. And tax consequences may apply. So weigh your choices carefully. And consult with lender, tax, legal and estate planning experts before taking the plunge.
Cash-out refinance pros
If you’re nearing retirement, but still pay a mortgage, refinancing that loan may be a smart move. That’s especially true if you can get a better interest rate or loan terms.
But it may also make sense to tap into your equity and with a cash-out refinance before retirement. This can:
Improve your cash flow. That extra money can help fund a remodel, auto purchase, tuition, medical bills, and more. “For example, maybe you need a remodel in the next few years. Well, you may want to take care of it now. That’s because you may have a harder time qualifying for a refi or home equity loan later,” says Jennie Jacobson, mortgage loan consultant with Orange County’s Credit Union.
Possibly lower your monthly payments. Plan to move within a few years? Then it may pay to refinance to an adjustable rate mortgage that offers a low introductory rate period. This period should match the time you plan to remain in the house.
Help you save for retirement. You can use the cash-out money to invest in your retirement savings through a 401(k), IRA or another plan. “It’s fine to take cash your home at low rates if you can reinvest that cash at a higher rate,” Realtor and real estate attorney Bruce Ailion “But to borrow at around 5 percent and reinvest in something Treasury notes at 3 percent doesn’t make sense.”
This can be risky at a time when most experts advise safer investments that preserve your capital, rather than aggressive ones that can pay more but also lose big.
Consolidate and pay off debt. You can use the extra cash to pay down other high-interest debt. “Your cash flow can improve if you eliminate unsecured credit card debt. That’s because this kind of debt usually has high monthly payments,” Jacobson says.
Cash-out refinance cons
Taking money out during a cash-out refi isn’t a foolproof plan.
It can cost more than it’s worth. Refinancing involves closing costs. These can equate to around two to five percent of the loan amount. Experts advise avoiding a refi if you expect to sell your home within five years.
You may need to move sooner than you think. “I find many retirees and pre-retirees are in homes that are not ideal,” says Ailion. “The home you bought 10 or 20 years ago may not include aging-in-place features that will allow you to live comfortably. Before taking on more debt, evaluate where you want to live and what your needs are.”
Related: Guide to mortgage closing costs: Average mortgage costs and how to keep yours low
You may be in debt well into retirement. Let’s say you’re 60. If you take out a new 30-year loan, it won’t be paid off until you’re 90. If you don’t make it that long, your heirs are on the hook to pay off the mortgage.
There’s more to think about, too. With a cash-out refi:
The interest may not be tax deductible. “Interest on cash-out refis are now deductible only if the money is used for home improvements. Assume you use the cash to pay off old debt or supplement retirement income. In this case, you won’t be able to deduct the interest from your taxes,” says attorney Elizabeth A. Whitman. She notes that this applies only if you itemize your tax deductions.
It may impact your Medicaid eligibility. “Maybe you have limited income and are facing medical issues or nursing home care. Cash in the bank from a cash-out refi is not exempt,” adds Whitman. “It needs to be spent on eligible living expenses or medical care before you are eligible for Medicaid.”
You may get hit with a prepayment penalty. Some mortgages slap on fees if you prepay before the term expires. Check your loan documents carefully.
Worried about resetting your loan to a longer term? Not sure you can afford the monthly payments on a shorter-term loan? There’s no shame in choosing a 30-year fixed loan.
“You can always pay extra each month or year to pay off your loan more quickly if you have the extra money to do so,” suggests Jacobson. (Check that there’s no prepayment penalty first.)
Remember: choosing a 10- to 15-year loan can result in higher monthly payments. “And that may not be affordable after you retire,” Jacobson says.
Related: Refinance without restarting the clock on your mortgage repayment
Also, if you plan to sell your home shortly after refinancing, don’t sweat it.
“You can choose to sell whenever you want to,” notes Jacobson. “But there may be an early termination fee or pre-payment penalty for some loans. Ask your lending expert about products that are better for the short-term. These can have a slightly higher interest rate but no closing costs.”
If you own your home outright, or have a lot of equity but are strapped for cash, and are at least 62 years old, check out a reverse mortgage. This provides quick cash by permitting you to borrow against your home’s equity. If you lack sufficient income, a reverse mortgage may be easier to qualify for than a cash-out refi.
The good news is that lenders cannot discriminate against you your age.
“But they can underwrite income and ability to pay back the loan,” says Whitman. “Let’s say you have a lower income today. Then the amount of loan you may qualify for could be smaller and on less favorable terms.”
For these and other reasons, get advice before making any lending decision. Determine if your new mortgage payment will strain your budget once you retire.
“Talk to a loan officer, CPA, and investment professional,” recommends Jacobson. “The most important question to ask is: Is this loan better than the loan I have now? If the answer is yes, you can evaluate the costs and feel more confident about your decision.”
Verify your new rate (Mar 25th, 2021)