Should You Refinance Before or After Retirement?

Refinancing an existing mortgage is an ideal way to free up cash for a variety of endeavors, including college tuition, debt consolidation or home repair. Considering that interest rates are still at record lows, homeowners often wonder when is the best time for such an endeavor. These days, many of the nation’s 76+ million Baby Boomers may be particularly interested in the question: “Refinance before or after retirement?”

A recent article in U.S. News and World Report explored that very topic. Contributor Joe Udo, author of the popular blog, Retire By 40, offered some parameters for soon-to-be retirees.

Udo listed 6 factors to assess prior to refinancing a mortgage later in life:

• You have the opportunity to refinance through your bank or lender with a low or no cost refinancing program.
• You hold an ARM (adjustable rate mortgage)
• You plan to continue living in your current home.
• You have an excellent credit score and qualify for the best rate.
• You’ve built up a minimum of 20 percent equity in your home.
• Your present interest rate is at least 1 percent more than the current available rate.

It was suggested that if a homeowner meets one or more of the above criteria, then refinancing around retirement age could be a good idea.

Another consideration to address was how far the mortgage holder is from actually retiring. For those who are 10 to 15 years from getting out of the rat race full time, Udo recommends looking into a 15 year fixed rate mortgage. The ideal scenario involves tying the pay-off date with one’s retirement date. Then, viola! No more mortgage payments! Having zero debt during the retirement years is a great strategy for stretching one’s post-career budget. Another option worth looking into is refinancing to a 10 year fixed rate mortgage. Although it would mean paying a larger monthly mortgage bill, in the long run, being debt-free after retirement could make it worthwhile.

Individuals who are planning to retire within 1 to 3 years may have little choice than to retire with mortgage debt. It is increasingly common for retirees to have meager savings and no pensions. Refinancing could help in those types of situations, especially for reducing the monthly house payment and for those planning to stay put. However, those that can hang in there and strive to pay off the mortgage completely without refinancing would be in better shape at the end of the road, with no mortgage debt hanging over them.

The author of the article did offer a very crafty solution for increasing cash flow through a refinancing program. He explained that a homeowner on the brink of retirement could refinance to a 30-year fixed rate mortgage. That could free up some extra cash and reduce the monthly payment dramatically. The downside is that many will not make it to the end of the 30-year payment cycle and the heirs will be responsible for resolving the balance. 

Retirees who’ve decided that now is a good time to refinance may not have an easy time with the pre-approval process. Prospective borrowers with diminished incomes may be eligible for other options, such as a reverse mortgage or HARP (Home Affordable Refinance Program).

Reverse mortgages are for homeowners who are 62 years of age or older. To be eligible, they must have either paid off their mortgages entirely or almost, and reside in the home. Known as the Home Equity Conversion Mortgage or HECM program, it allows senior homeowners to take out a portion of their property’s equity. The homeowner has the choice of withdrawing the funds through a line of credit, in a fixed monthly amount, lump sum, or combination of all three.

Repayment is required when either the last surviving homeowner moves out of the home or passes away. The estate then has a 6-month period in which to repay the balance, which is typically handled through a property sale. The estate or heirs are not financially responsible if the home sells for less than what is owed on the reverse mortgage. The estate, in turn, inherits the remaining equity if there is any. Reverse mortgages are federally insured and have no income or credit requirements. For those reasons, they are great for older seniors on a fixed income.

Finally, the Home Affordable Refinance Program or HARP was established in 2009 to assist troubled homeowners withholding underwater mortgages. It may be the ideal solution for some retirement-age borrowers. To be eligible for this type of refinancing, the mortgage must be held by either Freddie Mac or Fannie Mae. Mortgages that originated as an FHA, USDA, VA or jumbo mortgages, are not HARP-eligible. There are several requirements, including that borrowers must be current on their monthly mortgage payments and have a perfect payment history within the past 12 months.

Each situation is unique based on the borrower’s circumstances. Before taking the plunge into a refinancing program, borrowers are strongly advised to discuss the available choices with a professional financial advisor or mortgage lender.

To learn more about options available to you, contact eLEND today about our refinance programs. Get a free rate quote today and start on the path to a better financial future.