Refinancing strategy: Retiring your mortgage

Posted by  on Mar 12, 2015

Refinancing a mortgage loan is often driven by short-term considerations: taking advantage of low refinance rates, making monthly payments more affordable, taking cash out for an immediate project, etc. However, while short-term thinking may spark your interest in refinancing, be sure you also do some long-term planning before you settle on a refinance loan.

Given the length of mortgage loans, they are often scheduled to extend into the homeowner's retirement, and you may increase the chances of this happening if you refinance. So, think ahead a little bit and focus on whether you would prefer to retire your mortgage loan before you retire.

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Repeated refinancing could continually extend the time horizon of your mortgage debt, by spreading remaining payments out over a longer period and/or tapping into equity with a cash-out loan. However, there may be several benefits to choosing a refinance term which coincides with, or even precedes, your planned retirement. Here are some of those benefits:

  1. Take the strain off of retirement income. Retirement income comes under a lot of pressure. Recent years have seen a drop in interest rates shrink the retirement income many people had planned on, and this income can also be squeezed by inflation over time. If you are able to retire your mortgage and thus eliminate your monthly payments by the time you retire, it would give your retirement budget some much-needed breathing room.
  2. Hedge against retirement uncertainty. The aforementioned interest rates and inflation are just two of the uncertainties associated with retirement planning. Perhaps the biggest of these uncertainties is that you never know exactly how long a time period you need to plan on funding. According to the U.S. Census Bureau, the average man can expect to live about 17 more years upon reaching age 65, and the average woman nearly 20 years. However, these figures have been rising over time and, of course, some people exceed the average. Paying off your mortgage helps you face that uncertainty in two ways -- by creating an asset cushion in the form of equity in the home, and by reducing the "burn rate" of your resources by eliminating the monthly mortgage payment.
  3. Lower your mortgage rate. While you can minimize your monthly payment by refinancing to a 30-year mortgage, choosing a shorter loan will not only help you retire your mortgage before you retire, but it will also probably allow you to get an even lower mortgage rate. Generally, shorter-term mortgages offer significantly lower rates than longer-term ones.
  4. Reduce overall interest expense. Not only do shorter mortgages typically carry lower rates, but by paying interest over fewer years, you can sharply cut the amount of interest you have to pay over the life of the loan -- something else that should help with your retirement saving.
  5. Diversify your assets. Assuming you are already building a retirement fund of stocks and bonds, building equity in your home can help you diversify your assets. Adding equity in your home alongside stocks and bonds will make you less vulnerable to a downturn in any given asset class.

Again, meeting some immediate goals may be your primary consideration when choosing a refinance mortgage. However, if you do a little thinking ahead, you may be able to both meet those goals and enhance your retirement planning as well.

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