If you’ve spent any time watching late-night TV, you’ve probably heard of refinancing for your home. But do you know what it means? Or what it could mean for you and your future? Refinancing your home means that the bank takes your existing mortgage, pays it off, and then gives you a new, different one. This is basically a reassessment of your home and its value. What could this mean for your future? That really depends on where you are financially when you get to retirement.
What Goes into Refinancing?
Refinancing agents will look at a lot of different factors before giving you an option. Some of the most important things they look at is your credit score, your home’s equity, what it would cost to finance, your debt-to-income ratios, and your breakeven point.
Reasons to Refinance
Realistically, there are a few ways to get cash in your retirement. You could sell off items that you don’t use, or you can look at stock options—or you can look into what your house can do for you.
It’s also important to note the obvious about these payments: they will be hugely different from your first mortgage. If you took on a 15-year mortgage, and then refinance to a 30-year, that monthly mortgage payment is going to be slashed in half, or more depending on certain factors. This can be a huge help for people who are trying to think about their retirement, wouldn’t you like to have a lower mortgage and some cash?
Of course, you could also take the opposite route, and go for a higher monthly mortgage, with a shorter loan period. In this way, you can refinance and then become available for things like a reverse mortgage after you’ve hit the 15% equity threshold. Or, you can throw all of the money you can at it, and pay off your home in a smaller amount of time, which will save you money in the long run by eliminating that accruing interest.
You could also use that money to consolidate debts. That’s a huge benefit when you look at the interest rates between the average credit card and the average mortgage interest. Most cards run between 10% to 15%, while mortgages may run as low as 2.5% in some cases. Borrow cheaper money to pay off your debts faster.
Reasons to Not Refinance
Do not refinance if you think you might miss payments—that’s why it’s important to keep some of that refinance money for monthly payments. It can be tempting to take the money and run off to a vacation or buy luxuries, but it’s a terrible idea if your bank account is even a little wiggly. Make sure to pay attention to the overall life of the new loan in comparison to the one that you have already—it might not be worth it in the long run to refinance, even if it lowers your current mortgage by a few hundred dollars currently.
You also may not be able to look at reverse mortgage options. Reverse mortgages are a great way to access your home’s equity, meaning that if you refinance, you suddenly have zero equity, and thus no room for a reversal. You need to be over 65, but more importantly, you need at least 15% of the equity in your home before you can take a fraction of it back. You can read more about how this works here:
Some Questions to Ask About Refinancing
There are a lot of questions to this whole refinancing situation, so here are some helpful questions that you should ask yourself, your financial advisor, and the refinance agent:
- How much longer are you planning on staying in the home? Are you wanting to give it to your kids?
- If you passed away, would the costs of the mortgage be covered by the cost of the property?
- What are your goals with refinancing?
- What is the best way to use your refinancing availability?
There are many things to consider before doing this. Just make sure you take your time before deciding.