If you’re a boomer approaching retirement age, congrats! You’re on the home stretch to white sand beaches, margaritas at lunch and weekends spent on the golf course. Ok … maybe not so fast. Many boomers – those born during the post-World War II baby boom between 1946 and 1964 – still have healthy careers and are choosing to postpone retirement for a number of reasons.
Refinancing, however, is a great way to make your life a little easier whether you’ve stopped working or not. If you do it right, you could have the type of high quality of living that most dream of for their golden years.
Not only that, many boomers dream of going into retirement debt free - especially mortgage free. Is it still possible to pay off your mortgage before you retire? And, more importantly, is it the right thing to do? The answers are here; keep reading!
The State of Retirees Today
Many of you already know that your situation today is not the same as the one that your parents enjoyed. In fact, the data backs this up. Today retirees:
- Hold a higher mortgage debt than their parents’ generation
- Have a higher debt burden versus income ratio than at any time since 1992
- Owe nearly three times the amount on their mortgage than retirees in 1992
Worse than that, retirees in their 70s and 80s are less financially secure the older that they get. This insecurity is leading so many baby boomers to want to find a way to pay off their biggest debt burden before they retire - their mortgage.
Refinancing to shorten your loan term to pay it off early while you are still working is a good idea if you can afford it. However, if you are like most boomers, some financial analysts say that going into your retirement with a mortgage is a smarter strategy.
There is a Problem with Being Mortgage Free?
When you rush to pay off your mortgage you may wind up overburdening yourself with very high monthly payments that are too hard to handle. On the other hand, by refinancing you are either going to add to your debt - which cuts into your savings - or you are going to drag out the pay off date, increasing the amount of interest you pay overall.
Still, that interest you pay is one of the biggest yearly deductions on your taxes. When you pay off your mortgage you lose that deduction. On the other hand, when you reduce your payments, you pay less interest each year and so your tax deduction goes down as well.
Maybe having one big debt is not so bad? Think about this. With your mortgage you have equity that you can access when you need it. Yes, you will extend the life of your loan and you will ultimately pay more interest, but whenever something unexpected comes up - as it often does - like a medical bill, an adult child in need of help, even a hurricane, your equity can be a welcomed safety net. Knowing that you can refinance to add some liquidity to your finances is a comforting thought.
What is Your Financial Situation?
Perhaps it is not so bad, but it all depends on your personal situation. Of course if you have retired with a large portfolio of investments and assets, you don’t have much to worry about. You are already set.
But if you are like the more than 30% of retirees who are still carrying mortgage debt, you are going to have to strategize to make your mortgage work for you. Retiring without a mortgage is pie in the sky for most people.
- Over 40% of those 65 and older pay a monthly mortgage that eats up 30% of their total income.
- Over 60% of those over 80 pay at least 30% of their total income toward their mortgage.
The Consumer Financial Protection Bureau reports that since 2001, the number of retirement aged homeowners holding mortgage debt has nearly doubled. That makes paying all of your other expenses that much harder. So, it’s time to start strategizing!
First, here’s a few recommendations for retirement specialists:
- You should avoid having a mortgage debt total that is more than 25% of your overall income.
- Your home should only be approximately a quarter of your overall financial portfolio in retirement.
- You should consider liquidating some of your equity to supplement your income and give yourself some financial wiggle room.
Considerations Before You Refinance Your Mortgage
Understanding your goals is critical to helping you make the right decision. Answer these questions:
Are you refinancing to pay a large expense? If you are refinancing to make a large purchase or to finance an unexpected expense, make sure it is worth it. Weigh the costs and the benefits, as well as how long you think you’ll keep your home so you can calculate your breakeven point.
Are you trying to build more equity rapidly before you retire? Building up equity is smart, but it might not be worth paying a higher mortgage payment if you have certain cash flow requirements.
Can you afford it? Don't just look at the interest rate; make sure to look at the other fees involved with refinancing such as paying discount points and third party fees.
Are you making home improvements or consolidating your debts? Do you have some home improvements you've been putting off? Refinancing can be a great way to finance those projects and essentially letting your home pay for it's own updates. If you have high interest credit card debt refinancing can be a great way to consolidate at a lower rate.
Refinancing can be a big part of your plan, but is only one part of your overall retirement strategy. In order to make it work best, you have to have other assets in your portfolio as well, namely your savings and an emergency fund.
Start making maximum contributions to your retirement fund while you are still working. The sooner you start the better. If you are over 50, you can add $24K to your 401(k) annually. Create a 2nd savings account as an emergency fund by setting aside $100 or $200 per paycheck.
Finally, maybe it is time to get rid of your house altogether. The money you make from the sale of your home could supplement a very nice retirement in a beautiful condo. If parting with your home is not something you’re prepared to do – refinancing is still a great option.
Are you ready to refinance your mortgage?
You can use our refinance calculator to find out if refinancing is right for your particular situation. As a matter of fact, you can refinance right here right now with Lenda. Lenda is the most hassle-free online refinance you will ever find! No paperwork, no hassle. Find out more about us and then get started today!