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Should you refi in retirement?

By Jennie L. Phipps ·
Thursday, August 9, 2012
Posted: 2 pm ET

With rates so low these days, and given the deals that allow underwater homowners to refinance, should you refinance if you are in retirement or close to it?

It can be a tricky question. Bob, who lives down the street from me and is 70 years old, just signed the papers on a 30-year loan. It saves him $330 a month -- almost $4,000 a year. But it means that as long as he lives in his house, he will always have a mortgage payment. Previously, he was only about a dozen years away from being payment-free. If he had refinanced into a 10-year mortgage, his rate would have dropped precipitously and his payment would have risen slightly. But in 10 years, he would have owned the house free and clear. If he had just kept paying, he would be done in 12.

Here are some things to consider if you are making this retirement planning decision:

Do the math. If you're going to pay more by refinancing than you would if you just kept your current rate, then this isn't a good deal. If you think you may move, consider the savings in terms of the time you'll actually be in the home.

Will your financial situation change in retirement? If you will be living off savings instead of a defined benefit pension or some other predictable income source, you may find it difficult to refinance after you retire. If that's the case and you can swing the deal now, that might be a reason to do it.

How long are you really going to live in this home? Sure, your crystal ball is foggy. Still, putting yourself in a position where you can't or don't want to live in the house and you aren't able to find a buyer could trigger all kinds of other financial issues, some of them complicated by the fact that you have a long way to go on your mortgage.

What happens when you die? Can your surviving spouse or the person who will inherit the property handle the mortgage?

What are you going to do with the extra money? Debt is always a risk, so taking on more risk by investing the extra cash in the stock market or something like a sports car or a boat that depreciates quickly may not be a great idea.

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