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Is retirement too late for refinancing?

August 08, 2012

| MoneyRates.com Senior Financial Analyst, CFA

As a general rule, older people have been more victims than beneficiaries of today's low interest rates. However, some may turn that around by taking a fresh look at refinancing.

Due to a combination of factors, refinancing is no longer just for younger homeowners. Retirees today may find refinancing their home a sensible option, but there are a few questions they should ask themselves before they commit.

Conventional wisdom -- and a twist

Conventional wisdom has long been that it doesn't pay to refinance if you are not going to be in your house much longer. That tended to leave retirees out -- by that age, people are often looking to downsize their properties, not renew a mortgage commitment.

As a result, older Americans have usually been on the short side of the current low-interest-rate environment. As people who have accumulated savings, they are hurt by low savings account rates, while generally not being in a position to benefit from low mortgage rates. However, it may be time to rethink that equation.

The reason it doesn't pay to refinance when you don't going to be in your house much longer is that you would incur new closing costs up front, and would only have a limited number of years in which to reap any interest savings to offset those costs.

But the new twist is that mortgage rates have dropped so precipitously that it can take fewer years to offset closing costs. Combine that with the fact that people are living longer, healthier lives, and conditions are now more in favor of a retiree owning a home long enough to benefit from refinancing.

How to refinance with a shorter time frame

Refinancing calculators don't always suit seniors because they make comparisons over the length of a mortgage, meaning that they assume a 15- or 30-year time frame. Here are ways you can look into refinancing with a shorter time frame.

  1. Set a time frame. Start by deciding what your own time frame is likely to be. No one can predict the future, but you can likely make a reasonable estimate of how long you will be willing and able to stay in your home.
  2. Calculate mortgage savings over your time frame. Compare a mortgage at today's interest rates with your current mortgage to see what the savings would be, but only count the savings that would occur within your time frame for staying in your home. That way, you are not factoring in savings that you are never likely to see.
  3. Consider a shorter mortgage. When taking the above step, consider a shorter mortgage. A 15-year mortgage will save you about 0.70 percent compared with a 30-year mortgage, and older home owners have often paid off enough years of their mortgage that this is a more similar replacement anyway. That extra 0.70 percent in savings can be the kicker that makes refinancing pay off over a shorter time frame.
  4. Compare savings within your time frame with closing costs. Compare the savings you would realize within the time you plan to stay in the house with the closing costs on a new mortgage. Be sure to factor in any pre-payment penalty on the existing mortgage. This comparison will tell you whether refinancing will benefit you in that time frame.

Low savings account rates have made budgets tight for many retirees, but a well-planned refinance may be a way to free up some room in their budgets and finally see a benefit from today's low-rate landscape.

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