Should You Refinance Before or After You Retire? Or Not At All?

You may save yourself a headache by refinancing before you retire – or skipping the refinance altogether.

You can qualify for a mortgage refinance much more easily while you’re still working. That being said, you can still refinance during retirement if you have enough documentable income.

Here’s what to consider.

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Refinancing Before Retirement is Much Easier

Mortgage lenders base qualification on your current and projected income.

Documenting current income with W-2s and paystubs is straightforward. Some lenders can even pull your income documentation from a third-party service.

Even if you’re self-employed, proving income will still be easier than in retirement: you’ll likely have two years of filed tax returns on hand.

There is one catch, though. Your income should be expected to continue for three years. But what if you plan to retire before then?

Dealing With the 3-Year Income Continuance Rule

What if you plan to retire in a year? Does that mean you can’t use your current income to qualify for a mortgage?

Fannie Mae says that the lender can assume a three-year continuance for many income types including base salary, self-employment income, bonus, overtime, and others.

And, because people change retirement plans all the time, it’s best not to mention your retirement plans. This isn’t hiding anything from the lender because you can’t guarantee that you will retire when you plan to.

Simply let the lender follow spelled-out guidelines and assume your income will continue.

However, if you or your HR department mention an upcoming retirement, the lender must chase that information. It could derail your refinance.

At that point, you likely have to wait until you retire to refi.

Refinancing After Retirement Gets Harder

What if you are already retired or it's just weeks away? Documenting income gets much harder for most people.

Suddenly, you transition from stable, predictable income to other hard-to-prove income types:

• IRA distributions

• Asset depletion

• 1099 contract work

• Pension income

• Interest and dividend income

• Social security

These are all allowable income types, but they are harder to document, especially if they recently started.

For example, you continue to do contract work for your former company. You are technically self-employed and need two years of filed tax returns to use that income.

Or you recently started removing funds from your IRA. You have to jump through some hoops to verify these payments are sustainable long-term.

If you’re in retirement, get an idea of everything you might need by speaking with a knowledgeable loan professional. They will give you a list of documentation to gather.

Or, you can save yourself a lot of stress by refinancing while you’re still working.

Should You Refinance At All?

The above conversation assumes that you should refinance. Maybe you shouldn’t.

It depends on why you want to refinance. Following are alternatives based on your purpose.

Get cash out: You could try a home equity line of credit (HELOC) instead of a cash-out refinance. HELOCs come with very little closing costs. They also give you cash without affecting your primary mortgage.

Shorten your loan term: It may be unwise to refinance into a 15-year loan when approaching retirement. This could increase payments and cause a budget crunch in the future. Instead, make optional extra payments on your current 30-year loan, which you can stop at any time.

Reduce your rate: It’s usually a good idea to refinance if rates are much lower. Make sure you will stay in the home and loan long enough to recoup closing costs.

Lower your payment: Extending your loan to a new 30-year term can reduce your payments. However, this will cost you. You’ll pay closing costs and extra interest over time. Consider keeping your mortgage and cutting costs elsewhere.

Pay down the balance: You may want to reduce your mortgage balance with a cash-in refinance (paying down the loan at closing). Instead, try a mortgage recast. A recast is when you make a lump sum payment toward your existing loan. The lender re-amortizes the mortgage, often lowering the payment. The fee is often only $250-$500 instead of $5,000 or more for closing costs on a refinance.

Paying Off Your Mortgage

Some homeowners might consider paying off their mortgage before retirement.

This is a complex decision where you have to weigh current interest costs, other investment opportunities, the mortgage interest tax deduction, and how much you have in retirement assets.

A good rule of thumb is to pay off a mortgage with a low balance and relatively high rate and payment. It may be better to keep a loan with a low rate and pay off other debt or maximize your retirement accounts.

The best advice is to speak to a trusted financial advisor who can look at your entire situation.

Ready to Refinance Before Retirement?

If you’re approaching retirement and need to refinance, now is the time.

Avoid drawn-out documentation requirements and qualify using your steady employment.

Start your refinance.