There are more ways than ever to turn your equity into a source of retirement income. Outside of a plain-vanilla refinance, retirees can access their home equity through a cash-out refinance, a home equity line of credit or a reverse mortgage. Or you can downsize (more on that on the next page) and use the proceeds to beef up your nest egg. Read on to help determine the best option for you.
Refinance Your Mortgage
For many retirees, refinancing is the best option if you need to make your money work harder for you. It’s easy to do, and although rates have been inching higher, they are still at historic lows—about 3% for a 30-year fixedrate mortgage. (Kiplinger forecasts rates to be 3.5% by the end of year.)
“If you’ve got a 4% mortgage or higher and you can go down to close to 3% or less, I can tell you without even running the numbers that you are going to save money,” says Mari Adam, a certified financial planner for Mercer Advisors in Boca Raton, Fla. “You’re cutting the mortgage payments and saving potentially thousands on interest down the road,” she says.
If you’re closing in on retirement, you probably don’t want a 30-year term. You can save even more on interest if you shorten the life of your loan, Adam says. She advises clients to look into refinancing to a new 15year mortgage. With a 15-year loan, your payments may be higher, but you’re accelerating the payoff, which means you’ll be mortgage-free quicker and save thousands on interest.
If your mortgage rate is at least one percentage point above current rates, it’s usually a sign that it makes sense to refinance. But you may benefit from a refi even if your new rate would be less than a full point lower. You can compare refinance rates from various lenders at www.bankrate.com. Experts suggest getting at least three quotes before pulling the trigger.
Closing costs for refinancing typically range from 3% to 6% of your new loan amount, so knowing how long it will take to recoup closing costs—and when you plan to sell your home—is essential (see “How to Build (or Rebuild) Wealth,” on page 40).
You also want to double check how much home equity you have, as it could affect your chances of qualifying for refinancing. Some lenders may allow you to refinance with as little as 5% equity, but you will get a better interest rate if you have 20% or more. To see how much equity you’ve built up, go to www.bankrate.com and select “Home Equity Calculator” from the Home Equity tab.
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