How low interest rates may help retirees with their home goals

Your financial advisor can help you consider strategies during times of historically low rates.

Challenging times fueled by the COVID-19 pandemic have helped spur lower interest rates. Consider that during 2020, U.S. 30-year fixed-rate mortgages were recorded at their lowest level since Freddie Mac began its mortgage market survey in 1971.1

Interest rates reached historic lows in 2020

Monthly average commitment rate on 30-year fixed-rate mortgages
Line graph showing decline in average 30-year fixed-rate mortgage commitment rates since 2000
Source: “Current Mortgage Rates Data Since 1971,” Freddie Mac, as of August 2020.
For people nearing retirement or already retired, this period of low interest rates may offer opportunities to help achieve home-related goals. If you’re in one of these scenarios, you may want to talk to your financial advisor about whether it’s the right time to take action.

 

1. Refinancing if you are trying to pay off your mortgage

Having a mortgage in retirement can cause stress for some people, as it’s typically a significant monthly expense when you may be trying to find ways to protect the wealth you’ve built and make sure your retirement income lasts for decades of retirement. If you purchased your home at a time when interest rates were higher, refinancing now at a lower rate may allow you to shorten the amount of time it will take to pay off your mortgage, while keeping your monthly principal and interest payment similar.
 

2. Refinancing and using the savings to cover other expenses

If you’re not concerned about having a mortgage, but you have other expenses, like healthcare, refinancing may be a way to help pay for those expenses. Refinancing at a lower rate may leave you with a lower monthly payment, and you can use the savings every month to help pay for other bills now or save for them in the future.
 

3. Purchasing a new home or second home for your retirement

If you plan on moving to a new location as part of your retirement plan, would like a second home to spend your summers or winters in, or you’re simply looking to find a home that suits you better in retirement, low interest rates may make it a good time to buy if you plan on having a mortgage on the home. You’ll want to weigh, however, that home prices are currently strong in many markets, so while you may be able to secure a low interest rate, you might be paying a higher price for that home.
 

4. Tap into your home’s equity to improve your home to help you age in place

Interest rates don’t just impact conventional mortgages. Home equity loans and home equity lines of credit (HELOC) are also tied to the prime rate. You may be able to secure one of these loans at a relatively low rate and use the money to make accessibility or other upgrades to your home so that, as you age, you can stay in your home. You’ll want to note that home equity loans are typically fixed rate, while a HELOC is typically issued at a variable rate. However, with a HELOC, you don’t have to get the full amount of money all at once, which could impact how you pay it back and how much interest you ultimately pay. Explore the impact of this strategy first with your advisor, as your payment on either a home equity loan or HELOC will impact your retirement cash flow.
 

Your financial advisor can help you understand the impact of low rates

There are several pros and cons of refinancing, tapping into home equity, or purchasing a new home. Your financial advisor can help you understand how making a decision now could impact your long-term goals. They can run modeling scenarios to see how a financial decision, such as a home purchase, could change your retirement income later on.
 
Low interest rates impact more than just your home goals. They may also affect the rate of return on different investment types, such as bonds and annuities. It’s a good idea to reach out to your advisor and discuss whether now might be the time to consider any financial decisions.

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1 “Current Mortgage Rates Data Since 1971,” Freddie Mac, as of August 2020.
 
This material is for informational or educational purposes only and does not constitute fiduciary investment advice under ERISA, a securities recommendation under all securities laws, or an insurance product recommendation under state insurance laws or regulations. This material does not take into account any specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on the investor’s own objectives and circumstances.
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