How to Refinance a Mortgage for a Lower Payment in Retirement
You're nearing retirement age and you want to reduce your monthly bills before you get there. Refinancing your mortgage loan to one with a lower interest rate is one way to lower your monthly debt obligations. Depending on how low your new interest rate is, you could save hundreds of dollars each month on your mortgage payment. To refinance, though, you'll have to convince a mortgage lender that you have enough monthly income to afford your new mortgage payment. You'll also need a strong credit score.
Lenders will look closely at your gross monthly income when determining whether to refinance your existing mortgage loan. This can be a challenge if you've already retired because you are no longer earning a regularly monthly salary. Lenders will consider your Social Security payments, retirement savings, rental income, pension, disability income or other forms of monthly payments while calculating your gross monthly income. But it might be easier to convince lenders to grant you a refinance if you are still earning your regular salary.
Lenders will use your gross monthly income and monthly debt obligations to calculate your debt-to-income ratios. In general, lenders don't want your new housing payment -- including taxes, principal and insurance -- to total more than 28 percent of your gross monthly income. Lenders also don't want your total monthly debts, which can include everything from car loans and monthly minimum credit-card payments to your new housing payment, to total more than 36 percent of your gross monthly income. If your debt-to-income ratios exceed these percentages, which they might if you no longer have a regular salary to draw on, you might struggle to convince a lender to refinance your mortgage loan.
Lenders will be wary of refinancing your existing mortgage loan into another 30-year fixed-rate loan for one simple reason: If you are near retirement age, the odds are high that you will die before paying off such a long-term loan. Expect instead that lenders refinance you to, at most, a 15-year fixed-rate loan. Because your mortgage payments will be paid back over a shorter period of time than with a 30-year loan, your monthly payments will be higher. Make sure that your drop in interest rate saves you enough money each month to outweigh the higher payments that come with a shorter-term loan.
Before deciding to refinance, you'll need to weigh the pros and cons. Most retirees don't want to add more years of debt to their lives. By refinancing, you will be doing that. But refinancing could make financial sense if you plan on living in your current house throughout most of your retirement and your current mortgage loan has an interest rate that is at least 1 percent higher than what you can get through a refinance. It's important, too, to have a strong credit score, which will help you qualify for the lowest interest rates.
Refinancing isn't free. The Federal Reserve Board estimates that it costs on average 3 percent to 6 percent of your outstanding loan balance. If you owe $60,000 on your mortgage loan, this can mean refinance fees of $1,800 to $3,600. You again want to make sure that your monthly savings allow you to pay these refinancing fees back quickly. You can shop around with several mortgage lenders to find those offering the best rates and fees. You are not obligated to refinance with the company to which you currently send your mortgage payments. You can refinance with any lender licensed to do business in your state.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.