Dear Dr. Don,
I'm 59 ½ and considering refinancing my home's current 28-year mortgage of $295,500 at a 4.375 fixed interest rate to another 30-year mortgage with a 3.25 fixed interest rate. It will reduce my monthly payment by $200 but take my mortgage back up to $301,000. Would you consider this to be a good move? I'm attempting to downsize and position myself to a place where, when I retire, my pension can cover my housing arrangements as well as basic needs. Also, I may need to retire early and relocate to the East Coast sometime in the near future and have to sell my house. Any thoughts?
Between your downsizing thoughts and a potential move to the East Coast, you sound like you have one foot out the door. You may have a no-cost refinancing, but you're still increasing your loan balance by $5,500. Figure out your next move before rushing to refinance.
While the real measure of the financial benefits of refinancing is the reduction in your total interest expense, a common benchmark is how many months of lower monthly mortgage payments it takes to recoup your closing costs. In your case, it will take more than two years -- 27.5 months -- for you to make back the $5,500 by saving $200 a month on your mortgage.
It's smart to figure out how the mortgage payment, along with other housing costs such as property taxes and homeowners insurance, will be paid for with your retirement income sources. I've said in the past that it's a good goal to try to have the home paid off as part of your retirement readiness. If that doesn't make financial sense, then look at shortening the loan term to a 15-year fixed-rate mortgage. Or, at a minimum, do what you're doing and make sure you can afford your mortgage payments in retirement on that downsized East Coast bungalow.