So you plan to retire in the next five or fifteen years and want to reduce your mortgage payments? Today’s rate climate may offer you the perfect opportunity and timing to refinance and minimize the cost that you allot for your mortgage every month.
Experts advise that a drop of 1 to 2 percent in interest compared to the original rate on your first mortgage is a good sign to refinance, assuming all other factors remain unchanged. And depending on the interest you will get anew, you have a fair chance of saving hundreds of dollars each month so you can spend more on things that matter.
Here are the most important factors to look into if you plan to lessen your mortgage for retirement and successfully get refinancing:
Debt-to-Income Ratio
To qualify for a refinance, your housing expenses including principal, insurance, and taxes should not exceed 28 percent of your monthly gross income. That is only on the housing part. Your total debt payments (housing included) should not take over 36 percent of what you earn every month.
Retirement Plans
Is your credit score excellent? A good credit profile is a primary determining factor for whether you get that interest you are eyeing on or not.
Have you considered your future plans and decided to spend your retirement years in your current home? Then refinancing for the same loan term shouldn’t be a problem (for 15-year fixed-rate, at least).
Have you discussed your retirement plans with your children and decided that one of them would co-sign or co-borrowthe new mortgage? Better.
Weigh in the pros and cons of the decision before you apply.
Income
Lenders take careful note of your means to pay the owed loan and the first thing they look into is your income. In fact, even if you have saved a hefty sum in your retirement fund enough to pay off your entire mortgage, it doesn’t factor in. What they look into is your regular earnings. That is, the money that comes in your bank account from social security to investments, etc.
To make sure that your income would not trigger doubt in your lender, take the patience and effort to document all your sources of income. You can also ask your lender about annuitization to tap into your assets and use a part of it to represent income.
Loan Term
Most lenders would hesitate giving you the same terms for your new mortgage. Why? Because in realistic terms, there is more chance of non-payment due to death and that is not something your lender is willing to risk. It is typical for you to be advised to switch from ARM to FRM and mostly, to a 15-year fixed rate. If this happens and you originally had a 30-year FRM, you are more likely going to have to pay higher monthly, which is contrary to the purpose of this article. Yet it is worth mentioning if you are willing to compromise and pay off your mortgage faster instead.
Refinance Cost
Achieving lower monthly payments on a new loan could mean an upfront investment on your part. Refinancing typically costs about 3 to 6 percent of the loan amount. That translates into a few thousand dollars you need to shell out. You could pay this amount directly or avail of zero-cost refinance. But that would also mean sacrificing the lowest interest rate available for you if you pay the closing costs upfront.
Carrying a loan to retirement may not be for everyone but it does not necessarily spell insanity for those who are financially equipped and mentally ready to tackle the challenge. Do the estimates, talk to family and friends, and evaluate the options available for you before deciding to refinance.
Talk to an expert to tie down your retirement refinance plan. Click here.
