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.
-
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.
-
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.
-
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.
-
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.