When Boomers Should Consider Refinancing

“Sometimes its OK to have a variable rate mortgage even if youre retired,” he says. “If your situation is changing and your cash flow needs it, get a variable rate. But that should be only for a short period, 4 or 5 years at most.”

Davis cites the example of his own recent divorce. Because of high legal fees and a big payoff for his ex-wife, and because he had an abundance of equity in his home, he used a variable rate mortgage to tide him over until the payoff is completed in 3 years or so.

“My debt is higher than it has ever been in my home and my cash flow is a little worse, but I have a low interest rate,” he says. “The interest rate will sky eventually, but after I pay off the spousal support, my cash flow will go up, so Ill be able to afford it. Even if rates go to 8% or 9%, Im better off going to a variable rate now.”

Whether refinancing makes sense for a boomer depends on the individuals needs, agrees David Peskin, chief executive of Vertical Lend Inc., Melville, N.Y., a company that helps advisors arrange mortgages for clients.

“If you are looking to make home improvements and can handle the payments, if you are consolidating debt or if you want to buy a 2^nd home, refinancing can make sense,” Peskin says.

Often, clients run into cash-flow problems, and thats another instance when refinancing can pay off, even if they factor in closing costs, he notes.

“Lets say you have a $100,000 balance and the terms of the mortgage are 15 years. If I can refinance, Ill have maybe a $105,000 balance [factoring in closing costs], but Ill then have lower monthly payments. It can provide a big advantage,” he says.

Refinancing demands a close look at the benefits to the client, he says, and can be particularly beneficial if a client wants to make home improvements, for instance.

“It absolutely makes sense, because the house increases in value also,” he says.

“The main question is, does the client have an overall plan to get the income he needs?” asks Evan Levine, a financial planner at MML Investors Services Inc., New York, a unit of Massachusetts Mutual Life Insurance Company. “If its a matter of taking out equity to pay off debt at a lower rate, that would make sense. But I would not recommend it as a way to invest. I prefer no debt for investing.”

Reproduced from National Underwriter Edition, October 21, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.