3 Reasons to Refinance Before Retirement

Enjoying a comfortable retirement requires careful financial planning that starts years before leaving the workforce. You might open a 401(k) or an individual retirement account (IRA), increase your emergency fund, and pay off as much debt as possible.

While some people set a goal of being mortgage-free in retirement, others choose to refinance before retirement. This might seem odd since the idea is to minimize expenses in preparation for the non-working years. Yet, there are a few good reasons to apply for a mortgage refinance at this time.

1. Reduce Your Monthly Payment

Refinancing is the process of getting a new home loan to replace an existing mortgage. And in the process, you might also score a better mortgage rate which could potentially reduce your monthly payment.

Therefore, refinancing is worth considering when your mortgage rate is higher than current home loan rates. The truth is, depending on your circumstances, a rate reduction could help you save $200 to $300 (or more) per month, especially when you’re refinancing a lower mortgage balance.

This can lower your monthly housing expense, and in turn, stretch your retirement dollars. Also,
when a mortgage refinance reduces your monthly payment, it also frees up cash for other purposes.

If retirement is a couple of years off, you could use the savings to increase contributions to your 401(k) or individual retirement account. Or, you could use the extra money to pay off other debts like auto loans, personal loans, or credit cards.

2. Cash Out Your Equity and Pay Off High-Interest Debt

You can also refinance and cash out some of your home equity. By doing so, you’ll receive a lump sum of cash at closing, which you can use for just about any purpose.

Do you have high-interest debt, like credit card debt? The money pulled from your equity can go toward paying off this debt, which decreases your monthly expenses in retirement.

Keep in mind that a cash-out refinance will increase your mortgage balance. So your mortgage payment might increase depending on your new loan term. Since mortgage loans typically have a lower rate than credit cards, your new monthly payment might be less than your credit card payments.

Also, you can refinance and borrow cash from your equity to build up a cash reserve or even supplement your income. Some people also put the money toward home improvement projects. This can create a more comfortable space and boost your property value. If you decide to sell, the increased value means you’ll walk away with a bigger profit.

3. Get a New Mortgage Before Your Income Decreases

Refinancing a mortgage will require submitting a new loan application and getting approved. Therefore, lenders will evaluate your credit history and your income—again.

Some retirees see a significant drop in income after retiring. And when income decreases, it becomes harder to refinance. Therefore, if you expect an income drop after retiring, now’s the time to apply for a refinance.

By refinancing, you can take advantage of a lower interest rate or pull cash from your equity before you’re living on a fixed income.

Final Word

Mortgage refinancing can help you reach many of your financial goals. To learn more about the refinance process or to start your application, contact the loan experts at Blue Spot Home Loans today.