Should you refinance in the decade before retirement?

By Michele Lerner

For the Deseret News

Published: Saturday, Nov. 23 2013 8:40 a.m. MST

Any decision to refinance should be made in the context of your overall financial plan, but when you're in your mid to late 50s or early 60s you need to make every money move with retirement in mind.

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Editor's note: This article originally ran on ShopRate.com. it has been reprinted here with permission.

Any decision to refinance should be made in the context of your overall financial plan, but when you're in your mid to late 50s or early 60s you need to make every money move with retirement in mind. If current mortgage rates are lower than the interest rate you're paying on your mortgage loan, you may be tempted to rush into refinancing. Before you decide to take the plunge, however, consider the pros and cons of taking on a new loan. If you do decide to refinance, make sure you choose the right mortgage loan.

Check your cash flow

When you're entering the final decade or so of employment, it's important to do two things at the same time: reduce your debt and increase your retirement savings. If you're not saving enough to meet your retirement timeline, a refinance into another 30-year fixed-rate loan could make sense, particularly if you are careful to use your savings on your loan payments to reduce other debt or to put more in your retirement accounts.

However, by refinancing into another long-term mortgage loan, you're extending the time it will take to pay off your loan. Your closing costs will add to the balance and you're likely to end up paying more in interest over the life of the loan even if your interest rate is lower simply because you've added years of extra payments.

Terms to consider

If you are nearing retirement age, you should have an idea of your future plans, particularly whether you plan to stay in your home or not. If you plan on selling within a few years, you're better off not spending the cash required to refinance.

If you want to stay in the home, you need to calculate whether you can pay off your loan in full before you retire. If not, you need to think about how you'll make your mortgage payments once you stop working.

One solution is to refinance into a shorter loan term of 20, 15 or 10 years. But be careful: Once you commit to a shorter loan term, your payments are likely to increase. Make sure you can afford the larger payments and that the loan payoff will occur before you stop work.

In addition to making the regular calculations about what your payments will be at various interest rates and loan terms, think carefully about how much time is left on your current home loan. If you have more than 10 years left to pay on your loan, it may make sense to refinance, particularly if you can afford to shorten the loan term. Refinancing a loan with less than ten years left may not make sense, so at this point you're paying more in principal than in interest.

Consult a mortgage lender and a financial planner to work out the best scenario for your refinancing and retirement plan.

Michele Lerner, author of "Homebuying: Tough Times, First Time, Any Time," has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com and HSH.com.

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