Refinancing a home at any age is a major decision. When you’re a senior, there are added dimensions and concerns that must be addressed before diving in and making the decision to refinance a home – especially if you’re on a fixed income. That being said, many seniors weigh their options each and every day, wondering what your refinance options happen to be. This guide will walk you through the entire process and help you make an informed decision about whether refinancing is the best option for you and which refinancing option you want to choose once the dust settles.
Why Consider a Refi Loan for Your Home?
People select the refinance option for their mortgages at all stages in life and for many different reasons. Seniors often come to this consideration for one of the following reasons:
- Pay down medical debts.
- More breathing room in the budget.
- Take once in a lifetime opportunities while still young enough to enjoy them.
- Make home improvements – prepare the home for aging in place (pulls in the bathroom, wider hallways, ramps, etc.).
- Pay off high-interest debt.
- To help your children.
- Reducing the interest rate on your mortgage.
- Extend the terms of your mortgage (lower your payments, extend the terms).
It doesn’t really matter why you’re considering refinancing your home. That is your money to tap into. However, understanding what you want to do with the money may open doors to other options and alternatives worth considering.
Refinancing Options for Seniors
The big question on the minds of many seniors seeking advice on refinancing options is whether it is even an option for them. Many worry that living on a fixed income might exclude them from the ability to refinance their mortgages. Nothing could be further from the truth. The size of your income isn’t as important in these calculations as the size of your income compared to your total debt. Lenders refer to this as your debt to income ratio.
Another consideration lenders keep in mind when extending credit to retirees involves your available credit. If you have credit cards that have been around for decades at this point and are close to zero for the balances, you may have a sizable amount of available credit. Lenders want to see you using less than 30 percent of your available credit.
This is one of those instances in life where less is more. The less available credit you’re using, the more good news it is for your credit score and the likelihood of you securing a favorable refinance offer.
The best news for seniors seeking refinance options, though, is that there are quite a few options available to you including those listed below:
- Conventional or conforming refinance loan. Depending on your credit situation and your current income, this option may present a few additional challenges, but it isn’t outside the realm of possibility that you could qualify for a conventional or FHA refinance loan as a senior – even after retiring. These types of refinance loans often offer the lowest interest rates, making them ideal for goals that involve reducing your monthly payments by lowering interest rates or extending the life of your loan.
- Reverse mortgage | home equity conversion mortgage (HECM). If you’re not planning to leave your home to your children or you have sufficient assets to leave them that they will be able to cover the costs of recovering your home from a reverse mortgage, this might be the perfect choice for you. Rather than paying off your existing mortgage and issuing a new one, this mortgage allows you to withdraw cash from your home that will become due when you, or your spouse, no longer life in the home or you and/or your spouse pass away. The older you are when applying for this type of loan, the more money you’ll receive from the lender. The HECM is the FHA version of the reverse mortgage.
- Loan modification. If you have a solid history of timely payments with your lender, and your goal is to reduce your interest rate or extend the terms of the loan a few years to lower your payment, they may be willing to modify the loan rather than issuing you a completely new loan. The less money remaining on the principal of the loan, the greater the odds that your lender will be willing to do this for you. In most cases, they’d rather keep your business than risk having you take your business elsewhere for a refi or reverse mortgage.
- Home equity line of credit (HELOC). A home equity line of credit allows you to use the available equity in your home as a line of credit that you can essentially “borrow” from as needed. This allows you to do what you want with the money when you need it and leave it alone otherwise, for the duration of your “draw period.” The amount of available equity is usually up to 85 percent of the value of the equity in your home. Just make sure to learn about the interest rates and how they are determined as well as whether lends charge any upfront or other fees.
- Cash-out refinance. This type of loan occurs when you seek a refinance loan that is larger than your existing mortgage loan. If you’ve owned your home for quite a while it is likely the value of the home has grown beyond what you initially borrowed, allowing you to “cash-out” and take all the current equity out of the home and begin again with your home loan. This is not always the recommended course because it leaves you most vulnerable to foreclosure, often leaves you in need of private mortgage insurance, and may force you to pay higher closing costs than you expected. However, if your home needs extensive renovations to make it suitable for aging in place, this might be your best option.
Before you decide which of these options is the best choice for you, it’s a good idea to consider why you want to refinance in the first place. Your needs in a refinance loan if you’re simply trying to reduce your monthly expenses by extending the duration of your loan is different than if you’re looking to cash out so that you can pay down other debts, go on a dream vacation, or taste the good life a little while you’re still young enough to enjoy it.
Is Now the Right Time to Refinance?
This is one of the most important questions you can ask when considering refinancing your home as a senior. If you’re still working, it might be the perfect time – especially if your debt-to-income (DTI) is relatively low and you or your spouse has a robust retirement in the works. Even fixed incomes, if they are sufficient, can be intriguing to lenders – provided other elements fall into place.
Ask yourself these pointed questions to help you decide if you are ready to refinance now or if perhaps it might help you out to take a little more time before making that decision.
- How long will you remain in your home? It’s not worth the effort or the expense to refinance unless you plan to remain in your home for at least five more years.
- Do you plan to pass your home on to your children when you are finished with it?
- How much will it cost to refinance (this includes things like appraisals, inspections, closing costs, etc.)?
- How much will it save you – if saving money in your monthly expenses is your goal? Will it be worth it?
- How much equity do you have in your home? Are you planning to cash it out or reinvest it immediately back into the home? A huge down payment like that may help you eliminate PMI and greatly reduce your interest rate on the home.
For the most part, it always comes back to your ultimate reason for refinancing and how close the reality of the refinance process you choose will get you to your goals.
Advice for Maximizing Refinance Potential
Even if you’re only planning on refinancing your home, you must still go through all the motions of qualifying for the process – whichever route you plan to take. This means there are things you want to take the time to do before you apply for the refinance loan for seniors of your choice, including those listed below.
- Polish up your credit report. This means you need to order a copy of your credit report and see if there are any outdated or inaccurate information on the report. Additionally, you want to take the time to improve your credit score if possible. This will help reduce your interest rates and improve the likelihood of approval.
- Gather up all the supporting documents you’re likely to need. The more documentation you have on hand to support any income claims, the better. This includes information about assets, debts, and income now (if not already retired), and throughout your retirement.
- Determine how much you need to reduce your interest rates to make it worth your while. If you’re worried about reducing expenses during retirement, if you’re not enjoying a large enough interest rate reduction it might not be worth your effort to refinance your home. Especially if something like a loan modification is an option for you. While you do need to be in good standing with your existing lender for a loan modification, it can make a huge difference on your bottom line, especially if you can reduce the interest rate on your home and extend the payment terms.
- Pay down debts in other areas in an attempt to improve your available credit and make your DTI more appealing to lenders. If your credit utilization score or your debt-to-income ratio is high, it will be more difficult for you to get the relief you’re looking for. See if you can move things around by paying off some of your debt to make these numbers look more favorable to lenders. They’re looking for a few key details in your money management efforts and having the right ratios can make or break your efforts to refinance your home before they even begin.
Doing these things can make a huge difference in scoring the interest rates or terms you seek in your refinance loan. It isn’t always easy, but it is possible. These steps will help you get a better outcome for your efforts.
Don’t let doubt prevent you from even trying to refinance your home. Senior or not; retired or not, there are always options to consider and pursue. Any one of the options can help you find breathing room for your retirement finances, find relief from medical expenses, take a dream vacation with your family, help your children, or even make renovations to your home that will allow you to age among decades of memories for you and your spouse.