A mortgage, especially a 30-year fixed rate mortgage, can provide financial advantages for those in retirement. Yes, you read that correctly – a mortgage against your primary residence in retirement may be a wise financial move. While conventional wisdom may suggest otherwise, refinancing your home, particularly to take cash out, may provide some surprising benefits. We’ve summarized the benefits and considerations we often discuss with clients who are in or near retirement about a keeping their mortgage or refinancing to access cash from their home.
Benefits of a Mortgage in Retirement
Boost Your Nest Egg
A cash out refinance provides cash that may be then invested in your nest egg where it will likely earn more than the interest rate on your mortgage.
Access to cash
A cash out refinance provides access to funds from your home that can be used for needed expenses, repairs and maintenance of the property, and/or invested for future needs.
Cash Flow Flexibility
The cash from a refinance can create income options for those in or near retirement.
Having flexibility on where income comes from in retirement can open up opportunities for strategies to reduce your current and future tax burden.
Generally, costs increase over time for everything from groceries to gas. A mortgage provides a fixed housing cost (outside of an increase in property taxes) compared to renting where the cost may increase. Since other investments such as stocks and bonds may go up in value over time, the retiree with a mortgage gains what is called a hedge against inflation. Locking in a major cost like housing may help those in retirement (who therefore have a fixed income) maintain their purchasing power as the price of goods and services increase.
Considerations Before Refinancing In Retirement
Create a Plan for Proceeds
Without a plan, the funds could be spent in ways that don’t support long range goals and needs. Part of the plan for these funds may be to invest them for the long-term or to address more immediate goals or needs. Either way (or a combination of both!), when a plan isn’t created the funds may not be used to their greatest advantage.
It can be more difficult (but usually not impossible) to get approved for a mortgage refinance based on retirement income.
Feelings About Debt
The emotional impact of financial decisions is too often overlooked. The peace of mind gained from the opportunities a refinance provides needs to be greater than any stress having a mortgage creates.