Refinancing your mortgage when rates drop saves money on your monthly mortgage payment. If you’re a retiree, you may want to take advantage of lower mortgage rates by refinancing your house. But if your income in retirement comes from Social Security, a pension, retirement investments and even a part-time job, your monthly income may not add up to enough to satisfy mortgage lenders, even if you have hundreds of thousands of dollars in the bank. If you want to refinance your home after retirement, be prepared to wade through some additional paperwork and shop carefully for a lender.
Income vs. Assets
Mortgage underwriters look at monthly income as a measure of your ability to pay a mortgage. Mortgage lenders don’t like your housing expense -- mortgage payments, taxes and insurance -- to be more than 28 percent of your gross monthly income, according to Bankrate.com. Mortgage lenders aren’t as focused on how much money you have in your retirement accounts and other savings, even if this amount is more than enough to pay off your mortgage. They consider monthly as money you receive every month into your bank account – from pensions, Social Security, investments and jobs.
Adjusting the Ratio
One way to qualify for a mortgage in retirement is to pull money from savings to pay down your mortgage to the point where the ratio of your projected monthly payments falls below 28 percent when compared to your monthly income. You’ll need to play with the numbers to determine how much more you’ll need to pay on the house and whether or not this move is worth saving a few dollars a month with a new, lower interest rate mortgage.
If you have significant savings in an IRA, 401(k), stocks or other assets, ask your mortgage lender if it will annuitize your assets and consider them as part of your monthly income. With annuitization, the lender considers a percentage of your assets -- usually 70 percent -- and divides that amount over the life of the loan. Then the lender divides the resulting number by 12. This represents the potential amount you could draw each month from your assets as income. Annuitization can bring your monthly income into line with lenders’ requirements.
Not every mortgage lender is familiar with annuitization, so you may have to approach more than one company before you find one that will work with you. Federal mortgage lenders Fannie Mae and Freddie Mac both accept annuitization for their mortgage loans. You should present the lender with good records showing all your assets, so he’ll be working from the most up-to-date information for the annuitization process.
Cynthia Myers is the author of numerous novels and her nonfiction work has appeared in publications ranging from "Historic Traveler" to "Texas Highways" to "Medical Practice Management." She has a degree in economics from Sam Houston State University.