Should I refinance my mortgage given my current financial situation?

I have 22 years left to pay on my mortgage of $167,000 with an interest rate of 5.25%. I'm 64-years-old and I have no other outstanding debts. My FICO score is currently 827. Is it worth it to refinance? Can I refinance the remaining 22 years instead of the entire 30-year mortgage?

Debt, Real Estate
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December 2017

Whether or not it makes sense to refinance depends on your goals and timeframe.

I know that the conventional wisdom that you've read (here and probably elsewhere) is to refinance the loan. Even with recent Fed rate increases, mortgage interest rates are unchanged and you'd likley find a conventional mortgage rate somewhere between the high 3% range to mid 4% range without many or any points. Such rates are certainly less than what you're paying now.

But the bigger question is: Will you be moving within a few years? You may want to retire and downsize for example. Incurring the costs for a refinance would not make a lot of sense in that case.

Another question to consider: Are you refinancing because you're looking to increase your cash flow? Obviously, at a lower interest rate for a 20-, 25- or 30-year term, you'll probably find the mortgage payment for a new loan based on a lower original principal amount than your current loan will likely bring your payment amount down. (NOTE: Most lenders will only offer loans in increments of five years so you won't likely find a 22-year term. You may always prepay to end your loan on the same time table).

I think that you should consider an option that increases your cash flow and releases the equity locked up in your home. You may want to look into retiree equity conversion loans. These types of loans are also referred to as "reverse mortgages" because the lender "pays" you and you are not required (but always have the option) to pay back principal or interest or both while still living in the property.

Such a strategy gives you more breathing room which will allow you to stretch your household resources. And by unlocking the equity, you can continue to live where you're at without needing to relocate or downsize (that's a quality of life issue that many retirees or soon-to-be retired folks like). And an equity conversion loan also allows you to maintain your separate investment portfolio longer.  You can use the equity conversion loan to pay for things instead of taking taxable withdrawals from your investment or retirement accounts.

Consider this:

If you refinance your current $167,000 balance for a 20-year fixed term at 4.5% (just a guess), you'll pay about $1,056 per month for principal and interest. If you do the same but for a 25-year term, your payment will be $928. Obviously, in either case, you'll be paying more interest as this is a new loan. Yes, that is tax deductible (currently but that may change). How much of a difference is that from your current loan? Only you can tell. But think about how your cash flow improves if you didn't have to make a cash outlay for either. That's the power of an equity conversion / reverse mortgage.

AARP and Investopedia have great articles on such loans if you're interested.

December 2017
December 2017
December 2017
December 2017