Questions To Ask Before Refinancing A Mortgage
Asking yourself the right questions can help you decide if you’re on the fence about refinancing. These questions are best answered with the help of a financial expert, but some can be answered on your own. For example:
- How long do you plan to stay in the home, and how many years are remaining on the mortgage?
- Will you pass this home on to your children when you pass away? If so, does your estate have sufficient assets to pay off any remaining mortgage balance?
- What are you hoping to accomplish by refinancing? Do you want to reduce your rate? Lower your monthly payment? Withdraw equity?
- If you’re seeking lower payments, how much money would refinancing add back into your monthly budget?
- If you’re refinancing into a shorter-term loan, how would that affect your budget?
- If a cash-out refinance is in the cards, how would you use the extra cash?
- How much will the refinance cost, in terms of closing fees? Will this money be paid out-of-pocket or rolled into the loan? How would rolling the costs into the loan affect the monthly payments? How would paying out-of-pocket affect your savings?
- What interest rate would you qualify for based on your credit profile? How does this compare to the rate you’re currently paying?
Buy A Home With A Cosigner
One of the quickest and easiest solutions for seniors who are having trouble with income qualifying is to add a cosigner.
Some retired parents are doing this by adding their children to their mortgage application.
A child with substantial income can be considered alongside the parent, allowing them to buy a home even with no regular cash flow.
Fannie Mae has an increasingly popular new loan program for cosigners. The HomeReady mortgage program allows income from nonborrowing household members, like adult children, to be counted.
To qualify for HomeReady, you must be purchasing a primary residence not a vacation home or investment property.
Ask Your Lender For A Lower Interest Rate
You donât always have to refinance to secure a lower interest rate. Often, you can simply call up your lender and negotiate an interest rate decrease. Youâll be in a better position to do this if you have reliably made your repayments on time for an extended period of time.
If you arenât confident asking your lender to reduce your interest rate, Lendiâs Home Loan Specialists will be happy to negotiate on your behalf.
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What Is Your Purpose For Refinancing
In some instance, homebuyers will do what is called a cash-out refinance. This means the refinanced mortgage loan is for a larger amount than the existing one, and the homeowner gets the difference between the two loans in cash to spend on other purposes. If you are a person looking at a cash-out refinance as a way to pay off debt or make home improvements prior to retirement, this could prove to be a financial burden rather than an advantage.
Consider carefully before extending the burden of making monthly mortgage payments into your retirement years. Your goal at this point in life should be to reduce monthly payments and reduce debt. Also, if you have lived in your home for a while, you most likely have built up equity. Increasing your mortgage could eat away at that equity, which could otherwise be used for financial emergencies in retirement.
Can A Retired Person Refinance A Mortgage
Then, how does a retired person qualify for a mortgage?
Under the Equal Credit Opportunity Act, lenders cannot discriminate against borrowers based on age retired borrowers, like working borrowers, simply need to show that they have good credit, not too much debt, and enough ongoing income to repay the mortgage.
One may also ask, can seniors on Social Security get a mortgage? No matter the reason, senior citizens are more than able to qualify for a mortgage. According to the Federal Trade Commission , elderly people are protected against discrimination from getting a loan or any kind of credit based on their age.
Also know, can you refinance on Social Security?
The Cons of Refinancing a Mortgage in RetirementAccording to the Social Security Administration, a typical 65-year-old who is retiring can expect to live another 20 years. Refinancing into a shorter loan term can also backfire if your retirement income and savings can‘t sustain higher payments.
Should I refinance in retirement?
If you’re nearing retirement, but still pay a mortgage, refinancing that loan may be a smart move. That’s especially true if you can get a better interest rate or loan terms. But it may also make sense to tap into your equity and with a cash-out refinance before retirement. Possibly lower your monthly payments.
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You Might Not Want To Pay Off Your Mortgage Early If
- You need to catch up on retirement savings: If you completed a retirement plan and find you arent contributing enough to your 401, IRA, or other retirement accounts, increasing those contributions should probably be your top priority. Savings in these accounts grow tax-deferred until you withdraw them.
- Your cash reserves are low: You dont want to end up house rich and cash poor by paying off your home loan at the expense of your reserves, says Rob Williams, managing director of financial planning at the Schwab Center for Financial Research. He recommends keeping a cash reserve of three to six months worth of living expenses in case of emergency.
- You carry higher-interest debt: Before you pay off your mortgage, first close out any higher-interest loansespecially nondeductible debt like that from credit cards. Create a habit of paying off credit card debt monthly rather than allowing the balance to build so that youll have fewer expenses when you retire.
- You might miss out on investment returns: If your mortgage rate is lower than what youd earn on a low-risk investment with a similar term, you might consider keeping the mortgage and investing what extra you can.
- You need to diversify: Your house is just as much of an investment as whats in your portfolio. And overconcentration carries its own riskseven when its in something as historically stable as a home. Maintaining your mortgage allows you to fund other asset classes with possibly more growth potential.
Refinancing Goals For Older Homeowners
There are several common ways to refinance before retiring:
- Leverage your home equity with a cash-out refinance
- Refinance into a new loan with a lower interest rate
- Extend your existing mortgage in a new 30-year loan
- Shorten your loan term to a 10 or 15-year mortgage
Each of these loan options come with advantages and disadvantages. Understanding which makes sense for your financial situation will be crucial for a positive experience.
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Include All Your Income
Your lender will ask you questions about your income and assets when you apply for a new mortgage or to refinance your loan. However, lenders dont only consider income from employment when they review your application. Maximize your chances of getting approved by including all streams of income with your application. Some income your lender might consider includes:
- Social Security payments
- Military pension payments and benefits
- Income from rental properties you own
- Payments from your IRA, 401 or other retirement accounts
- Royalty income from patents
The specific streams of income you can include in your application can vary from lender to lender. The most important factor is that the income you have is set to continue consistently. Your lender may exclude certain streams of income that arent long-standing. For example, your lender probably wont consider alimony as income if it is set to end in 12 months.
Pro #: Youll Have More Wiggle Room In Your Budget
Lowering your overhead costs may be a necessity if you expect your income to take a dip once you retire. If refinancing means a substantial reduction in your payments, it can make a serious difference in your monthly cash flow. Going ahead with the refinance before reaching the point where you actually need that extra breathing space gives you more money to bulk up your emergency savings or max out your retirement accounts.
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Why Not To Do It
Don’t refinance if you doubt your ability to maintain payments as long as you own your home. Don’t use a cash-out refi to pay off credit cards or other unsecured debt. And don’t use money to give to your kids or take around-the-world vacations . The risks are severe: Handle your cash badly and throw in some bad luck, and you could lose your house. That’s a lot worse than missing out on a bargain mortgage.
Linda Stern, former Wall Street editor for Reuters, has been covering personal finance since the 1980s.
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Property Tax Breaks For Seniors
One final thing to consider as a senior homeowner is that you may qualify for a property tax break.
Rules to claim your senior property tax exemption and the amount your taxes could be reduced varies by state. So check with your local tax authority or financial planner for more information.
If you do qualify for reduced real estate taxes, this could help lower your debttoincome ratio and therefore increase the amount you can borrow on your new home loan.
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Should You Pay Off Your Mortgage Or Invest In Additional Retirement Savings
According to the Center for Retirement Researchs study titled Should You Carry a Mortgage Into Retirement paying off your mortgage is the better choice unless you can earn a risk-free return that exceeds its mortgage interest rate or cannot satisfy its demand for risky assets without borrowing money. Few meet these exceptions, so the payoff option is the best bet. Basically, this minority is those who are willing to invest in stocks an amount that is equal to or exceeds their loan amount.
What Should People Should Keep In Mind About Refinancing If Theyre Near Retirement
All too often, people will only focus on the smaller monthly payment when refinancing mortgages. Remember that each time someone refinances, he or she is taking on a new term. If you have only eight years left on your loan but then refinance to a new 15-year mortgage, your payments may be lower, but you are taking a longer time to pay the loan back and may be paying far more in the long run.
Also, people tend to underestimate the sense of freedom a retiree has when he or she doesnt have a large obligation like a mortgage in retirement.
People should consider how long they will be in the home, how long they want to carry a mortgage and, most importantly, how much the loan will cost them over the life of the loan, or their life expectancy.
Also, keep in mind that having a lot of equity in your home gives you options in case you develop serious health issues that require paying for long-term health care. If you do a cash-out refinance, in which you borrow against the equity in your home, you could wind up without this potential source of funds.
However, if someone needs to retire early or has a hardship and there is an urgent need to reduce expenses, it may make perfect sense to refinance, especially if they have at least 10 years left on their current loan and the current interest rate is substantively higher than the new refinance rate.
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Consider Getting A Loan Instead Of Taking Funds From Your Nest Egg
Many retirees think they cant take out a loanfor a car, a home, or an emergencybecause they no longer receive a salary. In fact, while it can be harder to qualify to borrow in retirement, it’s far from impossible. One thing generally to avoid, according to most experts, is borrowing from retirement planssuch as 401s, individual retirement accounts , or pensionsas doing so may adversely affect both your savings and the income you count on in retirement.
Con #: The Loan Repayment Period May Be Extended
One of the issues youll have to decide when refinancing is what type of mortgage term to go with. The shorter the term, the higher the payment, but youll be paying your home off at a much faster pace. If youve got 10 or 15 years left on your current mortgage and refinance to a 30-year term, your payments will likely end up being much lower, but youll be faced with the prospect of owing money on the home well into your retirement.
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Now Is A Good Time For Retirees To Refinance Here Are Some Points To Ponder
- Order Reprints
As more Americans have bucked conventional wisdom in recent years and retired while still carrying a home mortgage, the market upheaval has created an opening to consider refinancing.
The average rate for 30-year fixed-rate loan dipped below 3.15% in early Marchversus an average rate of 4.5% in 2018 and 3.9% in 2019and recently hovered around 3.5%, raising the question of whether older owners should refinance their home loans even if it means adding years to their payoff date. For someone with a $300,000 loan, the difference between 4.5% and 3.5% is nearly $200 a month and $62,000 in total interest over 30 years.
From a pure budgeting standpoint, lowering a payment by even a few hundred dollars can drastically impact your quality of life and the strain on your investments and accounts, says Scott McCaskill, an advisor with McCaskill Financial in Frederick, Md.
Barrons brings retirement planning and advice to you in a weekly wrap-up of our articles about preparing for life after work.
For retirees, however, the decision to refinance a mortgage isnt simply a matter of weighing upfront costs against monthly savings to calculate how long it takes to break even. Older homeowners need to have a clear understanding of what they hope to get out of a refi, and what it means for the big picture of their planning.
If You Can, Pay It Off
Cash Flow Is Key
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How To Refinance A Mortgage During Retirement
As a retiree, the fixed income you receive from your retirement savings and Social Security benefits may not be enough to show lenders youre prepared to refinance your mortgage. If this is the case, you may need to pay down your loan amount to show youre financially stable enough to handle a refinance. Speak with a lender before paying down some of your mortgage to ensure this move is still beneficial to your budget.
Your 401 or individual retirement account savings may not be included in your current income calculations, especially if you havent received distributions from these accounts yet. If you have a substantial amount of money in these retirement assets, ask your lender if you can annuitize them so they may also be considered as part of your income. With your retirement savings taken into account in your income calculations, its more likely youll qualify for a mortgage refinance.
When analyzing your retirement income, its important to ensure you have enough to last throughout the years youre not working. Refinancing your mortgage may help you to pay off your home sooner or lower your monthly mortgage payments. However, you should weigh the pros and cons of a refinance before deciding if its right for your retirement budget.
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What Are The Drawbacks Of Refinancing Your Mortgage
A refinance could save on mortgage costs, but it’s important to weigh refinancing expenses. Those can include closing costs, which may run anywhere from 2% to 5% of the loan amount, as well as the adverse market fee.
The 0.5% fee assessed by Fannie Mae and Freddie Mac is charged to lenders but mortgage refinance servicers can pass it on to borrowers in the form of higher interest rates. If you’re subject to this fee, the added expense could nullify some savings associated with low mortgage refi rates.
Refinance Into A Shorter
If you are getting closer to retirement age, your natural inclination may be to refinance into a shorter-term loan in order to pay off your mortgage faster. But before you do that, there are some things to keep in mind depending on your individual circumstances.
“You should look for a lender who will offer you a loan for 10 years or even a specific term such as 11 or 12 years that matches the year you intend to retire,” says Boudreaux. “But be careful to do the math and find the break-even point to determine how much you will really save. If it takes too long to recover your closing costs and transaction fees, it may not be worth it.”
If you can’t match the specific number of years before retirement with a new mortgage’s term, you can make prepayments to make this happen. Use HSH’s It’s My Term prepayment calculator to find out the exact prepayment you’ll need to perfectly hit your time goal.
Adkins says it rarely makes sense to refinance into a shorter-term loan for borrowers who don’t have a lot of retirement savings because the higher monthly payments on a shorter loan term could further reduce the borrower’s ability to save.
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