When you are close to retirement and you need to increase your savings, refinancing your mortgage may seem like a good option. With the low mortgage rates available at this time, extending the period of your loan could prove beneficial for your savings in retirement. But refinancing comes with its own costs and risks.
Is Refinancing a good idea?
Extending or reducing your loan term could have a great influence on your finances during your twilight years, so you must carefully consider the pros and cons before you choose another mortgage finance option.
What are the benefits of refinancing?
1. Increase Your Savings
When you expect your monthly income to decrease after retirement, reducing your monthly loan repayment is necessary. Refinancing your mortgage will reduce your payments and increase your savings. If you refinance several years before you retire, you can use your savings to boost your cash flow. The increased cash flow will help you build up your savings, pay off other debts and allow you to raise the balance in your retirement account.
2. Turn Equity into Cash
An additional source of potential income would be to turn your attention to the amount of equity you have in your home. With the use of free online calculators, you can accurately gauge your borrowing power and subsequent effect on your repayments. Upon your refinancing, you may use it to pay off debt from credit cards and boost your credit score.
You can also use the cash to do some home maintenance and renovation projects that are long overdue. When you pay off your credit card debt, you will be in a position to enjoy access to other short-term loans and you can enjoy better cash flow after retirement. You will also be able to add new features to boost the value of your home should you plan to sell it.
3. Enjoy a Tax Break
You can enjoy a tax deduction on the interest you pay annually on your mortgage. That means that if you refinance, you will be extending the period of time you will enjoy this tax deduction. If your tax is likely to increase after retirement, you can take advantage of your eligibility to enjoy a tax deduction on your mortgage.
4. Avoid Lenders Mortgage Insurance
If you paid less than 20 per cent of the price of your home when you bought it, you would most likely have paid lenders mortgage insurance. This could be as high as 1% per year. If you refinance after you have built up some equity on your home, you could avoid paying private mortgage insurance on the new loan. This could allow you to apply the savings to your loan repayment and reduce the number of years needed to pay off the whole loan.
What are the potential drawbacks of refinancing?
1. Refinancing Has Its Costs
The new loan you take will have its associated costs. Typically, closing costs connected with your new loan could be as high as 5% of the total value. So if you still have a substantial amount to pay on your first mortgage, you may need to pay thousands of dollars to close the new deal. This closing cost may also take you five years or more to recover and this could cancel out the savings you were hoping to make. To ensure that you are actually gaining financially through refinancing, you need to find out all the closing costs and compare them with the expected savings.
2. Repayment Period Will Be Longer
A major decision you must make is the choice of the loan term. The shorter-term loans will attract higher monthly payments. This gives you the opportunity to move into retirement debt-free. But a longer term of about 10 to 15 years will allow you to make lower payments. These low payments could, however, end up extending well into your retirement period. To decide whether you should take a long-term loan, consider the number of years you have before you retire.
3. Savings and Equity May Be Wasted
If you don’t have a solid financial discipline, you could end up spending all your savings. So as you plan to refinance your mortgage, you must also plan your budget, track expenses and work towards meeting your savings and investment goals. That’s the only way you can be better off after you quit your day job.
4. Some Lenders Could Penalise You
Lenders may attach a penalty to early repayment of your home loan. Before you go ahead with your refinancing plans, take some time to look at all the terms and conditions in your mortgage loan. A penalty for early repayment could be as high 3% of the mortgage amount. If you add this to the additional closing costs, you may not actually be making any significant savings at the end of the day.