Refinancing a home before age 65 can make retirement far more enjoyable, because with a new loan you may be able to engineer mortgage-free living. The income you save can otherwise be used to travel, pursue hobbies or help children and grandchildren.
Unfortunately, more and more senior citizens are facing unpaid mortgage debt. According to the Consumer Financial Protection Bureau 30 percent of those who reach age 65 are still making monthly mortgage payments.
This is a huge problem because in retirement incomes routinely fall, meaning there are fewer dollars to pay ongoing expenses. Less income and a big debt too often translate into severe financial problems.
"By 2011," said the CFPB, "the percentage of seriously delinquent older homeowners in foreclosure spiked to over 50 percent."
Because the threat of foreclosure in old age is both serious and real there's every reason to make sure that housing debt is paid off before reaching retirement. This means that if possible the right time to start refinancing a home is in your 30s, 40s and 50s.
Setting a Date
Let's imagine that you're 46, born in 1969, and expect to retire at age 67, the year when you can get a 100-percent Social Security retirement benefit under current rules. Let's also say that your present mortgage balance is $150,000 at 5.0 percent and that your loan has 25 years to go.
You have 21 years to retirement but 25 years remaining on the mortgage. The mortgage payment is now $876.89 for principal and interest. Increase the payment to $962.58 and the mortgage will end in 21 years. With the larger amount you will effectively climate four years of payments at the very time when income is likely to fall.
For those in retirement avoiding four years of mortgage payments is important. In this example the borrower is saving $877 per month while in contrast the average Social Security check amounts to $1,294.
In our example the interest rate is 5.00 percent. As this is written qualified borrowers can get financing at 4.2 percent. Refinancing a home today with a 20-year mortgage at 4.20 percent will produce a monthly payment will be $924.86. With this approach you can say goodbye to retirement mortgage costs because the loan will be paid off before age 67.
There are closing expenses to a refinance and maybe cash at this moment is not easily available. In this situation you might want to look at a "no cost" refinance.
Let's start by saying there's no such thing as a "no cost" refinance in the sense of a free closing. What really happens is that with a no-cost refinance the borrower pays a higher rate of interest and in turn the lender pays most closing costs.
With a "no cost" refinance there may also be closing expenses for the borrower to cover such as tax and insurance escrow. On the other hand, when you pay off the current loan you will get back the money now in escrow. The result can sometimes be a short-term need for cash because the current lender may take some time to return the escrow funds for the current loan. For specifics, speak with a lender so you know exactly how much cash will be required at closing.
If you go for a no-cost refinance let's say the new rate will be 4.6 percent. This rate is negotiable; for this example it's the rate midway between 4.2 percent and 5 percent, the current interest charge for the loan. At 4.6 percent over 20 years the monthly cost for principal and interest will be $957.09.
If the 40s and 50s are well behind then there's still an option to consider: If you or your spouse are at least age 62 you may want to look into a reverse mortgage.
A reverse mortgage – or what is sometimes called a home equity conversion mortgage or HECM -- is based on real estate equity and not your income. As the Federal Trade Commission explains, "HECM loans are widely available, have no income or medical requirements, and can be used for any purpose."
With a reverse mortgage you're not required to make monthly payments for principal and interest. Instead, interest is added to the loan amount each month. The loan is not due until you leave the property, sell or pass away. The size of the debt to be repaid is limited to the value of the property so there are no claims against heirs. While there is no requirement to make monthly mortgage payments borrowers must still pay for such costs as taxes, insurance and HOA fees.
Reverse mortgages are complex so you will want to shop around and speak to various lenders. In addition, because reverse mortgage inherently involve tax and estate issues, it will pay to consult with a fee-only financial planner, a tax professional or an attorney who specializes in elder law for additional information and advice.