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Should You Refinance Your Home if You're Over 50?

Investopedia logoInvestopedia 04-12-2015 Donna Fuscaldo
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If you're a homeowner aged 50 or older, your age doesn't necessarily preclude you from refinancing your mortgage. Although conventional wisdom would say you want to shorten the length you’re paying a mortgage not extend it, there are instances when a refinanced mortgage makes sense, particularly in an environment where interest rates on mortgages remain low. Ever since the housing meltdown lots of people have taken advantage of the record low mortgage rates by refinancing their home loans, saving hundreds, if not thousands of dollars a year. At the same time, there are many others who for whatever reason haven’t refinanced their mortgage even though they stand to benefit from refinancing their mortgage.

For homeowners who are over 50, refinancing is a more complex question because they have to weigh cost savings against an extended loan term. With less money coming in during the retirement years, some people don’t want to be saddled with a mortgage, even if it means paying less interest today.

The Interest Rate Savings Must Be Worth It

The most obvious reason to refinance a mortgage is to get a lower interest rate and thus pay less for the loan. However, that only makes sense if the borrower saves enough to cover the closing costs. In many instances, refinancing isn’t the best choice unless you are saving 1% or more on the interest rate. That’s not to say you won’t save when the interest rate is less than 1% of the current rate, but then the closing costs are going to have to be low to make it worth it. (Read more, here: Should You Refinance Your Mortgage When Interest Rates Drop?)

Closing Costs Can Quickly Be Recouped

When it comes to refinancing a mortgage, seniors or those 50 and older, have to think of how long they plan to stay in their home. After all, a refinance isn’t free, and there’s going to be closing costs and potentially attorney fees associated with it. According to Bankrate.com, the average closing costs on a $200,000 home was $1,847 in 2015, down 7.1% from the average of $1,989 in 2014. Because there are costs associated to refinancing a loan, borrowers have to make sure they are going to make money in the arrangement. That means they have to stay in the home long enough for the interest rate savings to cover the closing costs and then some. Let’s say you purchased a home for $200,000 and paid $2,000 in closing costs. Meanwhile, your monthly mortgage payment savings from the refinance is $100. In that scenario, it would take you twenty months to break-even on the fees associated with the closing costs. For homeowners who plan on moving in a couple of years, a refinance may not be worth it. But if you are in your 50s and don't plan on moving soon, then a refinance could be a smart move. (Read more, here:9 Things To Know Before Your Refinance Your Mortgage.)

The Loan Payoff Is A Few Years Away

How long a 50 plus homeowner has been paying the mortgage is also going to play into a refinance decision. After all, if the borrower only has two or three years left on the mortgage it’s not going to make sense to reset the clock and start over with a new thirty-year loan. But if the mortgage is only a few years old and refinancing it is going to save money then it is worth considering. For homeowners who are half way through their thirty-year loan another option is to refinance into a shorter term mortgage. Borrowers could refinance into a 15-year home loan or one with a term that’s shorter than thirty years. (Read more, here: 4 Reasons Not To Refinance Your Home.)

No-Closing Costs 

In some cases, refinancing a mortgage can be an opportunistic move if borrowers can get the loan for cheap. Some banks and credit unions will offer their customers non-closing costs mortgages for borrowers looking to refinance. There are usually restrictions to these offers, but if members of a credit union or bank don’t get charged to refinance a mortgage, it can be an attractive option. For borrowers mulling a refinance it could pay off to make the move as soon as possible if the Federal Reserve moves to raise interest rates next year.

Expenses Need To Be Cut For Retirement

Unfortunately, countless people are facing a huge retirement savings shortfall, with many entering retirement with a mortgage payment and other debt. In lots of cases, the lower income isn’t enough to support their debt and lifestyle in retirement. (Read more, here: Typical Retirement Expenses.)  But what a lot of people do have is a good credit score that can save them money. For people nearing retirement, a refinance may not seem like the logical choice but if it lowers the mortgage payment each month, freeing up much-needed cash, it could be a life saver. Note of caution: borrowers who wait until they retire to think about refinancing are going to face a tougher time getting approval because of their lower income stream.  

Paying Down The Mortgage Quicker As An Alternative

Refinancing can be an attractive option but for people fifty or older an alternative way to get a lower interest rate is to speed up the time it takes to pay back the loan. Doubling up on payments each month will reduce the overall costs of the loan. Not only will there be savings from the interest rates, but borrowers will avoid the closing costs and the hassles associated with refinancing. (Read more, here:Is Making Biweekly Mortgage Payments A Good Idea?)

The Bottom Line

Refinancing a mortgage into a lower interest loan is a no brainer if it will save the homeowner money. But for people in their fifties there’s more to consider than the savings associated with refinancing a mortgage. Retirement is around the corner and refinancing the mortgage may not be worth it if it means a hefty mortgage payment will come with you into retirement even if you are saving money. One the flip side, refinancing could free up some much-needed cash in retirement to support a homeowner’s lifestyle. And for people 50 and older who plan to stay in their house over the long-haul refinancing can be a way to take advantage of interest rates that remain at low levels.

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