For many boomers, refinancing a mortgage to take advantage of low mortgage rates could pose problems. As they approach retirement, boomers face the prospect of having to live on a reduced income. So, should they refinance, when doing so would extend the time it takes them to pay off the loan?
Financial advisors can help boomers think through their financial objectives when considering refinancing their home, to make sure they do not undermine any of their retirement or other financial objectives.
As a rule of thumb, the boomer client should be advised not to take on too much debt, says Mark Davis, part owner and vice president of Haas Financial Services Inc., Southfield, Mich.
“One of the factors we look at for pre-retirees or retirees is that if total debt service of both principal and interest is 15% or less of gross income, they wont have trouble handling it,” says Davis.
The maximum burden he would recommend such a client take on for mortgage debt would be equal to 25% of gross income for both principal and interest.
Davis also recommends looking at the clients total investment portfolio, minus any retirement income, to evaluate how much equity is in the home. Too much home equity actually can be a bad thing, he cautions.
“We want to make sure no more than 20% to 25% of the persons nonretirement portfolio is in the home,” he says. “You want to have an adequate amount tied up in a home as a hedge against inflation. But if you have too much equity in the home, you may have trouble generating the retirement income you need. They must have adequate amounts of productive assets in their portfolio, and a home is not productive.”
Davis believes it doesnt matter whether a client has a 15- or 30-year mortgage, as long as the mortgage payments fit well within the big investment picture.
“If you need a smaller mortgage payment, 30-year is OK,” he says. “If the spread is wide enough between 30 or 15, then you should try to be in a 15, but its not a disaster to be in a 30-year if you dont have the cash flow to handle a 15.”
Even variable rate mortgages can make sense, despite their notoriety for fast-rising interest rates, he says. The key is to recognize them as a short-term financing tool to fit certain limited cash-flow problems.