Retiree’s Guide to Mortgage Refinancing

Put your papers in order

As with any mortgage, you’ll need to qualify, so your next step will be to get your documents in order. The biggest obstacle to any refinancing is qualification. Your debt-to-income ratio should always be within the threshold required by Fannie Mae and Freddie Mac, and that’s more difficult to do when you’re on a fixed income. So even with a perfect credit score, some retirees don’t qualify because they just don’t have enough income.

Account for all of your sources of income, including your Social Security funds, IRA or 401 (k) withdrawals, your pension, and dividends from stocks or investments. If you have other sources of income, such as alimony, income property, or a side business, include them. A constant source of funds is essential. You must be able to demonstrate long-term financial resilience. You will also need a new appraisal on your home, which can increase its value and help you qualify.

Set your goals

Are you looking to refinance for a lower overall payment, or the ability to pay off your mortgage faster? Or is it a way to increase your cash flow (either through lower payment or through cash-out refinancing)?

Once you understand your goals, it’s easier to move on to the next steps.

Goal 1: Get a better monthly payment or pay off the mortgage

  • Lower overall payment: Refinancing for a lower overall payment can put a significant amount of money in your pocket, says Josh Chamberlain, a financial planner based in Decatur, Georgia. For example, if you go from 3.75% to 2.75% for a fixed mortgage of $ 100,000 over 30 years, the monthly payment is $ 55 less, a saving of 12%. It might not seem like much, but on a fixed income it could make a bigger difference than you think.
  • Pay it faster: You can lower your interest rate while keeping your monthly payment or paying more to pay it off faster. If you got a 30-year mortgage in the 90s or early 2000s, the interest rates were as high as 9%, a far cry from the current rate of 2.74%. Lowering the interest rate and paying the same amount means you’ll pay off the house much sooner. Taking the example of Chamberlain above, he says, “A loan of $ 100,000 over 30 years, down to a 20-year loan, at 2.5%, for $ 67 more each month, you save 10 years. on your loan. And you pay $ 39,000 less in interest.

Advantages:

  • Lower interest rates, lower payments, and shorter payment terms are all possible with refinancing in retirement.
  • An added bonus to refinancing with a lower interest rate, says Larry Pershing, a member of the National Association of Personal Financial Advisors and CEO of Optimum Retirement Planning, is that it protects you against rising costs. inflation. “When someone takes out a fixed interest rate mortgage, they lock in their monthly payment,” says Pershing. For example, let’s say someone has a payment of $ 1,000. If inflation rises by 5% for a few years, that $ 1,000 “will become easier to pay, relative to everything else.”

The inconvenients:

  • You will still have to pay a fee and if you choose the lowest overall payment you will pay more interest over time.
  • You might not qualify if your income is too low.

Objective 2: Get money

Financial savvy homeowners can look for other ways to create more wealth or increase their income through their mortgage. Others may be looking to increase their monthly income, or wish to renovate their home, or even splurge on vacation. There are several options:

  • Refinancing of collection
  • Reverse Mortgage or HECM (Home Equity Conversion Mortgage):
  • Home Equity Line of Credit or HELOC:
  • Home equity loan

Refinancing of collection

Refinancing with cash is one of the riskiest things a retiree can do, but it can also be very profitable. You can use cash refinancing to pay off your loan, pay off credit card loans, or invest (in other property or in the stock market). You can also use refinancing to help with expenses and vacations.

With a refinance with withdrawal, “you increase the risk associated with the money that you have already used to pay off the loan,” explains Chamberlain. “If you need money for your monthly expenses, it may mean that you need to spend more time thinking about your monthly budget, rather than trying to take money out of the mortgage.”

But some retirees will refinance in cash and invest that money in the stock market.

It’s not as crazy as it sounds. Flannery has a client who owns their home for free but is refinancing and investing in cash. This is a calculated risk: its interest rate is less than 3% – and the annual returns on the stock market are on average 8 or 9%. His client is betting on a return on investment of 5%. And don’t forget: there is a tax deduction for interest paid on the mortgage.

Some retirees refinance their mortgage with a cash refinance so they can pay off other debt, especially credit card debt. Credit card interest rates are onerous – 13% or 14% minimum, usually – and if you can take a cash refinance at under 3%, that’s a huge savings.

Advantages:

  • Can use it to pay off other debts or invest in the stock market.
  • Can be a new source of cash.

The inconvenients:

  • This is one of the riskiest ways to stretch your money, especially if it is invested in the stock market.
  • One scenario should give you pause for thought, says Larry Pershing, Founder and CEO of Optimum Retirement Planning: “Many people use their home as a backup asset to pay for long-term care expenses if they arise. “Refinancing your home and withdrawing cash decreases the reserve you have to pay for unforeseen expenses such as long-term care.
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