Should You Refinance?

When it comes to refinancing a mortgage, timing is key

by: Liz Weston | from: AARP The Magazine | March/April 2011 issue

Dear Liz:

My husband and I might refinance our mortgage to a shorter loan so we can pay off our house by the time we retire. The steeper monthly payments, however, are daunting. How do we decide?

Financial expert Liz Weston. — Photo by Art Streiber

Being debt-free in retirement is a worthy goal, and low mortgage rates make refinancing all the more tempting. But don't opt for a shorter mortgage if the higher monthly payments significantly reduce your contributions to your 401(k) or other retirement accounts.

House built of coins and banknotes, close-up — Ian McKinnell/Getty Images

Remember, your retirement contributions typically score you a tax break (and matching funds, if your company offers them). Your money can also grow tax-deferred. These big benefits typically swamp the relatively low-interest savings you would get from paying off a mortgage.

You should also say no to a shorter mortgage if you're carrying any higher-interest debt, such as credit-card bills, auto loans, or education loans. These debts typically aren't tax-deductible — another reason they should be paid off before you tackle a mortgage.

Refinancing Your Home: 3 Tips

1. There's no true "no-cost" refinance. Costs are folded in as a higher interest rate.

2. Refinancing to lower your payment? Be sure you can recoup the costs in two years.

3. Opt for a fixed rate; inflation may rise before you can pay off a variable-rate loan.

Carrying Costs

More and more Americans are still paying a mortgage as they start their retirement years. And according to the latest Federal Reserve statistics, the amount of home-secured debt owed by people ages 65 through 74 also grew between 2004 and 2007, to a median amount of approximately $69,000.

Liz Weston, author of Your Credit Score: Your Money and What's at Stake, blogs at asklizweston.com.