If you are a retired senior or planning retirement, you should evaluate your home mortgage and any other debt you have. You may find that refinancing a home mortgage better fits your current and future retirement financial planning needs.
If you refinance home mortgage loans you can:
Lower payments: Refinancing can lower your monthly payments. This can result from choosing a lower interest rate or changing the length of your home mortgage loan term – or a combination of both.
Save money over time: If you lower your home mortgage interest rate, you can lower your interest payments and save money over time.
Generate cash: Cash out some of your home equity to generate upfront cash to pay off other higher interest debt or for other purposes.
Home mortgage refinancing can enable a variety of retirement financial planning goals. You can refinance home mortgage loans to:
Reduce Monthly Expenses: Reduce your monthly payments by taking advantage of lower interest rates on a new home mortgage or extending the repayment period of your mortgage.
Reduce Risk Exposure: Reduce your interest rate exposure to avoid the risk of higher interest payments in the future. You could switch from an adjustable-rate mortgage to a fixed-rate home mortgage loan or from a balloon home mortgage to a fixed-rate mortgage.
Adjustable-rate mortgages and balloon home mortgages could lead to dramatically high monthly payments if long-term interest rates rise.
Reduce Long-term Expenditures: Reduce your interest cost over the life of your mortgage by taking advantage of lower rates or shortening the term of your loan. Total interest payments over the life of a home mortgage are the largest single cost of a mortgage.
Increase Total Assets: Increase your total assets available for retirement planning by paying off your home mortgage faster (accelerating the build-up of home equity). This is accomplished by shortening the term of your loan. Free up cash for major expenses such as long term care or remodeling your home.
Pay-off High Interest Debt: Reduce expenses with debt consolidation loans. Often called a debt consolidation refi – typically the purpose is to pay off high interest, high cost credit card debt with the cash from a home mortgage refinance.
Lower Taxes: Lower your taxes by exchanging non-tax deductible credit card or car loan debt for tax-deductible home equity debt. The cash generated in a mortgage refinance can be used to pay off the non tax-deductible debt.
Points are an upfront cash payment required by the lender as part of the charge for the loan. Points are expressed as a percentage of the loan amount. For example, "three points" means a charge equal to 3 percent of the loan balance.
Generally, when you pay points, you are paying some money upfront in exchange for lower monthly payments and/or a lower interest rate.
Most loan companies will offer a range of point and interest rate combinations. For example, if you are only paying one point, then you are likely getting a higher interest rate than if you were paying three points.
In most cases, it is a good idea to pay points if you plan to be in your home for a very long time. If you are only going to be in the home for a short period, then you should not put money toward points. Conversely, if you believe that you will remain in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate. Point can be paid using cash generated from the mortgage refinance.
In some situations, the loan company will finance the points for you – offering you a negative point loan. Positive and negative points are sometimes termed "discounts" and "premiums", respectively.
The decision to pay points is unique to each consumer, and involves the tradeoff of upfront cost verses lower monthly payments.
NOTE: If your objective is to raise cash or increase your income and you have significant home equity built up, you may want to evaluate using a Reverse Mortgage instead of refinancing your home.
Home mortgage refinancing is not without risk. Be careful of the following scenarios:
Increasing your loan amount when refinancing a home: If you increase the amount of your home mortgage by cashing out home equity, you increase your financial risk due to the larger debt amount and, possibly, the longer term on your loan.
Mortgage refinancing closing costs could outweigh savings: Because there are transaction costs to refinancing a home, there is a risk that if your gains from mortgage refinancing are small, these will not outweigh the closing costs on taking the new home loan.
Choosing riskier loan terms: There are innumerable ways to structure a loan and some of these strategies can leave you open to a lot of risk. For example, if you use an Adjustable Rate Mortgage or a Home Equity Line of Credit that has a variable interest rate, then your monthly payments will rise if interest rates go up.
In general, the loan process will take you through the following steps:
Step 1: Understand your needs and goals – consider both financial and quality of life issues. How long would you like to stay in your house? Will the house work for you in case of a disability? Do you want to cut your monthly expenses or generate cash?
Step 2: Gather all the information you will need, such as home value, current mortgage information, income, credit history, etc.
Step 3: Research the different loan types available in the market, and have an idea of which ones you might want.
Step 4: Speak with at least three different lenders to get advice on loan structure and competitive rate and terms quotes. Decide on which lender, structure, and terms works best for you.
Step 5: Complete paperwork. Once you've been approved, you and your mortgage lender will:
Have your home appraised.
Set a closing date and location.
Review the Good Faith Estimate and other closing documentation prepared by your mortgage lender. This helps you anticipate costs that might be due at closing.
Arrive at the closing, where you will need to provide any outstanding information and sign your loan papers. At that point, you may also need to bring a certified or cashier's check for any closing costs that are your responsibility. This meeting generally takes less than one hour. Often, when you refinance, your closing costs are included in the total loan amount so you won't be expected to pay these fees out of pocket.
Once the loan papers have been signed, the "period of rescission" begins. You have three business days to decide whether to proceed with the loan. After that, the funds are released by the mortgage lender and your loan is complete. If you're receiving cash at closing, this is when your check will also be released.