Refinancing for retirees

Posted by  on Oct 08, 2014

Refinancing a mortgage loan might seem like the type of long-term financial commitment retirees often avoid, but it can make every bit as much sense at age 70 as it does at 40. The only difference is that being retired may impact what you hope to accomplish by refinancing, and that in turn should determine what kind of loan terms you favor.

Just last year, mortgage finance companies Fannie Mae and Freddie Mac adjusted their underwriting guidelines to allow accumulated retirement balances to be a factor in qualifying for a loan instead of just considering income. That adjustment was specifically geared to make it easier for retirees to refinance.

So does this make sense for you? Here are six guidelines for retirees to consider when refinancing:

  1. Don't be afraid to think beyond your life span. You may have reached a point where the odds are against your living another 30 years, but that does not mean you should rule out the possibility of refinancing into a new 30-year mortgage. Since life span is one of the most uncertain parts of financial planning, the best approach is to make your finances as sustainable as possible, and a long-term mortgage might be one way to do that.
  2. Your health is a big part of the decision. Specifically, your ability to continue to live independently should factor into your thinking. If you anticipate having to make different living arrangements within the next few years, it might not be worth the up-front expense of refinancing.
  3. Don't pay for what you don't want. Even if you expect to continue to live independently for years to come, take a good look around you. The home that might have been perfect for you when raising a family might be too large for your needs now or not conveniently located for your current interests. Before you sign up to continue paying for that property, make sure it is still the home you want.
  4. A cash flow cushion can be the key to living on a fixed income. Retirees often start to feel squeezed over the years as prices continue to rise while their financial means remain limited. This can be a powerful argument for lengthening the term of a mortgage by refinancing, to build a cash flow cushion by lowering your monthly payments.
  5. The older your current mortgage, the better a shorter mortgage might fit. If you find you can comfortably make your monthly payments and are many years into paying down your current mortgage, consider refinancing into a shorter loan. Shorter-term mortgages typically carry lower interest rates, and might match up better with the remaining years on your current mortgage.
  6. Be clear about your financial objectives. Refinancing can be used to obtain immediate cash, lower monthly payments, lower your ongoing interest rate, or reduce the total amount of interest you pay over the life of the loan. These objectives can often (though not always) conflict with one another, so be sure to identify your top priority so you will obtain the appropriate type of loan.

Remember, retirement does not mean you can stop actively managing your financial affairs, and this can often become even more important at that stage of life. Refinancing just might be the right tool to help you do the job.

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