Is refinancing for retirees a good idea? With interest rates so low these days many retirees and near-retirees are looking to take that step. This is often a smart move, leading to smaller, locked-in monthly payments or a chunk of immediate cash.
However, refinancing doesn’t make sense for everyone, and even for those who would benefit there are some common pitfalls to avoid. Below are ten key questions we think you should ask yourself before refinancing:
1. Would you prefer to have no mortgage at all?
Yes, interest rates are currently extremely low by historic standards, but do you want to be paying interest at all? Some retirees are fine with taking on a new loan while others find peace of mind reducing their debt as much as possible. If you’re lucky enough to be close to paying off your mortgage ask yourself whether you really need the additional cash from refinancing.
2. What are you going to do with that money?
On a similar note, before you refinance take a step back and look at your budget. What are you going to do with the monthly savings or infusion of cash? Is refinancing the best way to get this money or are there other options that make more sense? Even if refinancing is the best method try to plan out exactly where the money will go — this will help keep you focused as you make decisions throughout the process.
3. Will you actually save money by refinancing?
It seems like a no-brainer to trade in a higher interest rate for a lower interest rate. However people often forget to take into account the fees from the refinancing process. If your interest rate is already fairly low and the fees are high you may actually lose money by refinancing.
4. How long do you plan to stay in your home?
In order to figure out if you’ll actually save money by refinancing you need to estimate how long you plan to stay in your home. If you’re thinking of moving in the next few years then refinancing may not make sense — you won’t get the benefit of lower monthly payments for long enough to offset the fees you’ll pay. On the other hand, if you don’t plan on moving soon then even slightly smaller payments could save you a lot of money over time.
5. Will refinancing allow you to consolidate debt?
One way to think about refinancing is to view it in the context of all your other debt. Are you carrying a credit card balance? Do you have a high-interest auto or student loan? If so, it might be worth refinancing to pay off those obligations — then you’ll just have a single, lower monthly payment to make.
6. Can you show a consistent income stream?
This is often a huge issue for retirees. You’ve got plenty of savings but can’t get a loan because your lender wants to see regular monthly income. If you run into this problem try talking to a financial advisor or even the lender — often there are ways to structure consistent withdrawals from your savings over time to meet the requirements.
7. Does your lender know how to deal with retirees?
As we mentioned above, some lenders deny retirees refinancing because of income requirements. The key word in that sentence is “some”. As with anything, not all lenders are the same. A number use rigid formulas to screen applicants, which can result in loan denials. However, others are much more savvy — they understand how to annualize a 401(k)/IRA or take into account lower Social Security taxes. So while one lender may reject your application another who is used to dealing with retirees may happily give you a new mortgage.
8. Have you gotten quotes from multiple lenders?
Even if you’ve been approved for refinancing make sure to shop around. The interest rates offered by lenders can sometimes vary pretty drastically, and even if the difference is small it can add up over time. Also, don’t just look at the rate — make sure to take into account differences in fees and reputation as well.
9. Do you clearly understand all fees?
Speaking of fees, ask lots of questions about exactly how much your refinance is going to cost. Sometimes lenders or mortgage brokers will say that you’re not being charged anything at all. Be very weary of this claim. Make sure to ask if they’re taking any money out of the loan to cover the fees, or if you’re getting a higher interest rate in exchange for no up-front payment.
10. Are you really getting what was advertised?
Finally, before you sign anything make sure that you’re actually getting what was promised. Read all paperwork and confirm that the rate hasn’t changed and double-check that any fees haven’t been added. If you’re weary of doing it yourself, consider bringing in a lawyer familiar with the process.
Photo by woodleywonderworks via Flickr.