With interest rates> near record lows, refinancing has never looked so tempting especially for people nearing retirement, who d love some extra cash to pad their diminished savings. But for homeowners over 50, there s more to consider than just a lower rate.
Carrying a mortgage into retirement has traditionally been considered a bad idea ideally, you d be as debt-free as possible when your income stops, financial planners say. But in recent years, more retirees have had mortgage debt. About half of retirees said they carried mortgage debt in 2009, compared to one in four just two years earlier, according to the Society of Actuaries. They re carrying more debt, too. The median level of mortgage debt for those aged 65 to 74 jumped 108% from 1992 to 2007, to $69,000.
That trend is unlikely to abate any time soon. With the typical interest rate for a 30-year mortgage hovering between 4% and 6%, the temptation is obvious: more cash in hand. American homeowners who are eligible to refinance have in droves. Refinancing applications made up about 82% of total mortgage loan applications in October, compared to just 55% in April, according to the Mortgage Banker s Association. The payoff is hundreds of dollars in savings each month. A $200,00 mortgage balance at 6.5% refinanced to 4.5% could cut monthly payments by $200 or more.
At such low rates, does the old advice that you should be debt-free in retirement still hold? Many financial advisors say yes. The number one objective should be to be out of debt when you hit retirement, says Mark Byelich, president and founder of M.J. Byelich & Associates, a Trevose, Penn.-based wealth management firm. But there are some exceptions to the rule.
If you re thinking about refinancing and you re nearing retirement, some do s and don t s:
DON'T use the extra money to take on more risk
Some people are tempted to refinance even though it extends the term of their loan, so they can put the extra monthly "savings" into another investment like the stock market. Sure, over the long-term, the stock market has historically generated high returns (the average annual gain of the S&P 500 from 1926 to 2010 was 9.8%), but to get those kinds of returns, investors may need to stay in the market for decades. For example, between 1965 and 1980 the Dow Jones Industrial Average had peaks and valleys but ended at about the same level it began. So if you re less than 10 years from retirement, don t use that extra monthly savings from a refi for a stock-heavy investment. Instead, work on paying down your mortgage or other loans as quickly as you can. Investing should be secondary to paying off debt, says Byelich.
DO think about whether you'll move
If you don t plan to stay in the house long enough to recoup the closing costs typically about three years skip a refi, says Nancy L. Skeans, a CPA and partner at Schneider Downs Wealth Management Advisors in Pittsburgh. But if you're planning to move in, say, five years or more, and your finances are stable, refinancing could help you buy that retirement home now. This is a compelling option because it s often harder buy a home once you retire, as your income is considered to be irregular, says Todd Tresidder, money coach, author of How Much Is Enough to Retire, and founder of FinancialMentor.com. Plus, because prices in many popular retirement areas are still depressed, this might be a good time to score a deal on a home. You could rent out one of the homes [now or later] to help pay for this [the extra mortgage], he says. (Just be careful of the tax implications of rental income).
DON T use the excuse, "I'll work longer"
A full 75% of workers aged 50 and older expect to have jobs when they are retired, according to a 2010 study by the Families and Work Institute and the Sloan Center on Aging & Work. That might make extending your mortgage loan into retirement seem OK. But a job is not an ace in the hole, says Eleanor Blayney, a consumer advocate for the CFP Board. People lose their jobs and get sick every day. That s even more true these days; the unemployment rate for workers ages 55 and older hit a record high in December 2009 at 7.2% and has hovered near that level all year. For those 65 and older, the unemployment rate is 7.6% nearly double what it was just five years ago. And it currently takes 35.5 weeks for a member of the over-55 crowd to find a job once laid off more than five weeks longer than their younger counterparts all of which make extending the term of your mortgage a risky proposition.
DO refinance if you need the cash
Savings aren t earning much interest (one-year CD yields are hovering around a mere 1%), 10-year Treasury bond yields are still at near-historic lows and unemployment remains fairly stagnant at 9.6%. Essential expenses like health care are rising employers plan to ask employees to contribute 12% more to cover health insurance costs in 2011 than they did in 2010, according to a study by Hewitt Associates. It all adds up to more people being strapped for cash and considering a refi that lowers their monthly payments even as it extends the term of their loan. If you need this cash for health care costs, consider refinancing, says Blayney. But don t fool yourself: Travel and weekly steak dinners at your favorite restaurant are not essentials.
DO opt for a 15-year term if you can
For starters, a 15-year term leaves more money in your pocket you'll pay much less in interest over the life of the loan. If you refinance a mortgage (assume a 5% rate) balance of $100,000 for a 30-year term, you will pay more than double what you'd pay had you opted for a 15-year term (about $93,000 in interest vs. about $42,000). Plus, you can get a historically low rate on a 15-year loan now, too.