Refinancing continues to make up majority of the mortgage activity in the last few months. Indeed, many homeowners are taking advantage of the near record low mortgage interest rates. But is refinancing for everyone?
It depends on whether refinancing would be advantageous in your situation. If the current rate is one to two percent lower than your original mortgage rate and you’re not yet 10 or 15 years deep into your payments, refinancing could be a wise option. The same can be said if you aim to refinance and tap into the significant equity you’ve earned in your home.
But how about in the case of senior homeowners?
No straightforward answer can be given for this important segment of the borrower population. But there is one element that warrants sincere consideration when it comes to refinancing: retirement planning.
There are other factors that might come into play when a senior homeowner considers to take a new mortgage for his/her home. But that is basically influenced by how s/he perceives his/her financial situation in the next coming years.
Does s/he intend to retire within the next five years? If so, refinancing may be unwise. Does s/he plan to stop working in 15 years? Shortening the loan term in his/her mortgage may be a valid reason to get a refinance, especially when rates are favorably low and s/he can afford higher monthly payments. Is carrying out the burden of paying for the mortgage loan possible even after retirement? Some seniors have money saved enough in their savings and assets to continue paying off the loan even after their last day on the job.
Whatever situation you are in, it is wise to talk to a finance professional first or find a really good online calculator to crack and compare the numbers first before you nod yes to taking out a new loan.
To help you decide, here are some factors that you might want to look into to make an informed decision:
- Preferred Place of Retirement
Do you picture yourself living in your current home and spend your retirement with your family, or do you intend to live somewhere quieter, sell the house, or choose someplace smaller? Your plans for the long term are vital considerations in deciding whether or not you should get that loan.
Refinancing would be sensible if you plan to live in the house you own now. Take a new mortgage to get lower monthly payments, or shorten your termto save on interest pay-outs. This is also applicable if you want to pay off the loan faster and move out and sell the house to enjoy retirement somewhere else.
- Post-Retirement Debt
Can you carry debt after retirement? Many people would prefer to be debt-free to relish their golden years. But some financial constraints along the way could sabotage your plans. If you really need to refinance to cash-out, for example, choose a shorter loan term to pay less on interest and finish paying the loan sooner.
Choosing to refinance with the same 30-year fixed-rate while planning to retire in the next 15 does not sound so sane to many. But if you have a backup plan that securely keeps you financially stable (savings, for instance) while without work, then go ahead.
- Which Method Works?
It’s practical to plan for the future if you have a good picture of how your financial status would look like. Hence, refinancing to a fixed-rate mortgage makes all the sense. Taking an adjustable-rate mortgage may be more appealing due to its relatively low rates and you might reason out that you will sell your house before the rate changes, but life’s circumstances are not certain. Some things may come up that might change the general scheme of things.
To buffer yourself from this potential inconvenience, make sure you know the maximum limit of the rates and the payment and see to it that you have funds you can tap into once the unexpected happens.
The Income vs. Asset Consideration
You might be confident that your refinancing will easily get approved because you have a significant amount of retirement savings. However, the underwriters don’t look at your assets to determine if you’re good for a remortgage. Instead, they look at your regular, monthly income. That accounts for money you receive periodically in your bank account from social security and pensions to investments, among others.
If you want to tap into your assets, however, there is a process called annuitizationthat you can use. If your Individual Retirement Account (IRA) contains a significant fund, such as 401(k), stocks or other assets, you can ask your lender if they can consider annuitization and consider them as part of your income.
The lender does this by calculating (typically) 70 percent of the amount and dividing that over the loan term. The resulting amount is further divided by 12. This final number represents the money you can draw monthly from your assets to use as income.
Annuitization is not common among lenders so you may have to exercise patience in looking for one who does. You can consult Freddie Mac and Fannie Mae for recommendations as all their lenders accept annuitization.
Your housing expenses must not exceed 28 percent of your monthly income, else you will have difficulty getting that refinance application approved. If you are in a tight situation on this one, you can patch things up by drawing money from your savings and use it as down payment on your new mortgage so that the ratio of your monthly payments would fall below this 28 percent limit.
How Much Does Refinancing Cost?
It is easy to trick yourself into thinking only of the advantages of refinancing. Beware of the real costs. The typical closing cost average at about 3 percent of the total loan amount. You can wrap this cost around your loan balance if you have significant home equity. However, this could mean spreading the payment throughout the life of the loan on top of interest. A higher interest rate is also charged if you choose to go for a zero-cost refinance. So if you have the money, better to pay it up front.
When shopping for refinancing options, compare all the associated fees before you pick up a lender to trust.
Retirement and Remortgage
Your retirement plan vitally interplays with your decision to take a remortgage. Making a wise decision entails weighing what you envision for yourself and your family in the future versus the demands of the present. Figure out the numbers. The math will give you a good perspective and raw information on whether the benefits outweigh the risk.