You may not have thought you’d have a mortgage as a senior, yet here you are, with a mortgage. If you’ve already retired, you might think refinancing is out of the question because you’re on a fixed income. But seniors have more options than you might think.
Reasons Seniors Need to Refinance
First, let’s discuss why seniors would need to refinance. Most seniors are at the tail end of their mortgage terms and close to paying their loans off. However, with a majority of their liquid assets tied up in the home, they may need to refinance for an assortment of reasons.
- Free up money in their budget – If you’re feeling suffocated by bills and don’t have enough disposable income, it can be scary. Retirement is when you should enjoy life and not worry about pinching every penny. Refinancing to take out some of your home’s equity might help.
- Cover large medical expenses – If you have higher expenses than anticipated in your senior years, you might want to use your home’s equity to pay them. This happens often when seniors have unexpected medical crises that require them to pay a large amount of medical expenses out of pocket.
- Consolidate debt – The pandemic forced many people to rack up high interest credit card debt. Using your home’s equity to pay it off might save you money in the long run if you racked up credit card debt.
- Support your children – Your children may be adults, but that doesn’t mean they don’t need help. For example, if your children have a crisis or you want to help them buy a house, you might consider tapping into your home’s equity.
How Can Seniors Refinance?
Seniors have more options to refinance than non-seniors, believe it or not. Even though having a mortgage isn’t ideal when you’re on a fixed income, there are ways you can refinance.
Here’s how.
Rate/Term Refinance
If your goal is to lower your mortgage payment to free up money each month, a rate/term refinance will work.
In this case, you’re focused on lengthening your loan’s term rather than getting a lower interest rate. A longer term means a smaller principal payment. Keep in mind, however, that the longer it takes to pay off your mortgage, the more interest you’ll pay.
Since interest rates are higher than they’ve been in a while, pay close attention to the monthly payment to ensure it makes sense to refinance.
Home Equity Line of Credit
A HELOC or home equity line of credit is a second mortgage on your home. You can usually borrow up to 80% of the home’s value minus your first mortgage balance. HELOCs usually have a variable interest rate, but you only pay interest on the money you withdraw.
For example, if you get a $100,000 credit line but only use $1,000 to cover some medical expenses, you only pay interest on the $1,000, not the $100,000.
Your minimum payment is interest only for the first ten years of a HELOC. After ten years, the loan goes into repayment, which requires principal and interest payments. Like a credit card, though, if you pay the principal back early during the first ten years, you can reuse it for something else.
You can use HELOC funds for any purpose, including paying medical bills, getting out of credit card debt, improving your home, helping a child, or taking that vacation you’ve dreamt of all your life.
Cash-Out Refinance
A cash-out refinance is a refinance of your first mortgage. Like a HELOC, it allows you to borrow from your home’s equity but adds it to your first mortgage rather than a separate second mortgage.
Most borrowers can use up to 80% of their home’s value minus any balance on their first mortgage that’s still outstanding. Then, you receive the funds in one lump sum and can use them how you want.
Some seniors use this option to invest the funds in another investment to keep the money growing while they use some funds for other purposes, such as medical bills or consolidating debt.
Reverse Mortgage
The reverse mortgage is the most popular option for most seniors, especially if you don’t have an outstanding mortgage balance now.
A reverse mortgage taps into your home’s equity but doesn’t require monthly payments. Instead, it pays you with funds in one lump sum, fixed monthly installments, or as a line of credit. Like the other options, you can use the funds how you want.
What’s different about this loan is how you repay the loan.
There aren’t any required monthly payments. To qualify for the loan, you must prove you can afford property taxes, home insurance, and home upkeep. You don’t have to qualify for a monthly payment.
Interest accrues on the loan, like any other mortgage, but it’s added on the back end of the mortgage. You don’t have to pay the loan off until you move or pass away. However, if you die before paying off a reverse mortgage, your beneficiaries must pay the mortgage off with the proceeds from selling the home.
The only requirement is you pay the property taxes and insurance on time and keep up with the home’s maintenance. You must also prove you live in the home full-time. The loan becomes due if you move out or are transferred to a nursing home full-time.
Final Thoughts – Should Seniors Refinance?
Like any loan, there are many factors to consider before seniors should refinance. Most importantly, can you afford the monthly payments? Next, consider how it affects your long-term financial plans.
If your plan to stay in the home long-term, using the equity now while you’re alive may provide you joy, and if you can afford the payments, it’s a great option. If you can’t, consider a reverse mortgage to enjoy your home’s equity without the stress of a monthly payment.
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