Should Retired Home Owners Refinance?
Interest rates are very low and mortgages can be refinanced at much better rates. Many younger home owners are taking advantage and saving themselves sometimes 10s of 1000s of dollars. Additionally older homeowners with fixed incomes see their mortgage payments increasing due to several factors and want to know if refinancing can help them too.
Take an example of a 68 year old with over a 4% interest rates and a principal of $48,000 left on their mortgage that is starting to have trouble covering all their monthly expenses.
“More often than not the calls aren’t being made to me as the lender until the mortgage is already behind, which is going to limit the options that we could look at,” Donny Schulze, a mortgage banker with Embrace Home Loans, said.
Its important to understand the way the mortgage system works.
Freddie Mac is not actually a lender. Like Fannie Mae, Freddie Mac is a government-sponsored enterprise that purchase pools of mortgages from banks, like Wells Fargo, and securitize them. By giving the banks an outlet for the loans it removes the risk for them and give them more cash to approve more mortgages. Without Fannie and Freddie, 30-year mortgages would be more a rarity than the default in this country.
Refinancing a mortgage could help to reduce ones monthly housing costs, but there may be limits. “Refinancing the balance of a $48,000 mortgage with an interest rate that’s in the low-4% range and bringing it down to today’s rates might not have as big of an impact as a homeowner might anticipate,” Schulze warned.
“Imagine what you would want when you’re 85, not when you’re 68,” said Brian Koss, executive vice president at Mortgage Network, a Massachusetts-based lender.
For some people, a refinance might not save them money overall, but could lower their monthly payments.
If your upfront with lenders and are willing to shop around it could pay dividends.
“We’ve given 30-year mortgages in the last year to people in their 90s,” Koss said. “It’s against the law for us to discriminate.”
Once you’ve done the math, determine whether it does make sense to refinance. Remember your problems are your current lenders problems, if you find yourself in a position where the payments are becoming burdensome your lender often has some solutions (many must be initiated while in good standing).
“[Your] problems are also [your] current lender’s problems,” said Holden Lewis, mortgage expert at NerdWallet. “[Your] lender doesn’t want [you] to fall behind on the payments, so it has an incentive to reduce the monthly payments and make them easier for [you] to afford. The lender might offer a refinance for a lower interest rate, with little or no closing costs paid out of pocket.”
A person who is in financial stress might also want to consider a reverse mortgage.
“Recent reforms have made these products much less risky than in the past,” said Tendayi Kapfidze, chief economist at LendingTree. “Since this borrower is struggling with cash flow, a mortgage that pays you rather than one you pay could be the way to go.”
A reverse mortgage works like a line of credit to pay for living expenses in your old age. When you die, or when you move out of the home, you must pay the loan back. Plus, people who are not careful about covering utilities, taxes and insurance can face foreclosure for failing to make those payments.
This process can be scary and if you need assistance as you go through this process, consider reaching out to a professional to walk you through it.