If you are a retired senior or planning retirement, you should evaluate your home mortgage and any other debt you have. You may find that refinancing a home mortgage better fits your current and future retirement financial planning needs.
If you refinance home mortgage loans you can:
Lower payments: Refinancing can lower your monthly payments. This can result from choosing a lower interest rate or changing the length of your home mortgage loan term – or a combination of both.
Save money over time: If you lower your home mortgage interest rate, you can lower your interest payments and save money over time.
Generate cash: Cash out some of your home equity to generate upfront cash to pay off other higher interest debt or for other purposes.
Home mortgage refinancing can enable a variety of retirement financial planning goals. You can refinance home mortgage loans to:
Reduce Monthly Expenses: Reduce your monthly payments by taking advantage of lower interest rates on a new home mortgage or extending the repayment period of your mortgage.
Reduce Risk Exposure: Reduce your interest rate exposure to avoid the risk of higher interest payments in the future. You could switch from an adjustable-rate mortgage to a fixed-rate home mortgage loan or from a balloon home mortgage to a fixed-rate mortgage.
Adjustable-rate mortgages and balloon home mortgages could lead to dramatically high monthly payments if long-term interest rates rise.
Reduce Long-term Expenditures: Reduce your interest cost over the life of your mortgage by taking advantage of lower rates or shortening the term of your loan. Total interest payments over the life of a home mortgage are the largest single cost of a mortgage.
Increase Total Assets: Increase your total assets available for retirement planning by paying off your home mortgage faster (accelerating the build-up of home equity). This is accomplished by shortening the term of your loan. Free up cash for major expenses such as long term care or remodeling your home.
Pay-off High Interest Debt: Reduce expenses with debt consolidation loans. Often called a debt consolidation refi – typically the purpose is to pay off high interest, high cost credit card debt with the cash from a home mortgage refinance.
Lower Taxes: Lower your taxes by exchanging non-tax deductible credit card or car loan debt for tax-deductible home equity debt. The cash generated in a mortgage refinance can be used to pay off the non tax-deductible debt.
Points are an upfront cash payment required by the lender as part of the charge for the loan. Points are expressed as a percentage of the loan amount. For example, "three points" means a charge equal to 3 percent of the loan balance.
Generally, when you pay points, you are paying some money upfront in exchange for lower monthly payments and/or a lower interest rate.
Most loan companies will offer a range of point and interest rate combinations. For example, if you are only paying one point, then you are likely getting a higher interest rate than if you were paying three points.
In most cases, it is a good idea to pay points if you plan to be in your home for a very long time. If you are only going to be in the home for a short period, then you should not put money toward points. Conversely, if you believe that you will remain in your house for a long time, then it may be worthwhile to pay additional points to obtain a lower interest rate. Point can be paid using cash generated from the mortgage refinance.
In some situations, the loan company will finance the points for you – offering you a negative point loan. Positive and negative points are sometimes termed "discounts" and "premiums", respectively.
The decision to pay points is unique to each consumer, and involves the tradeoff of upfront cost verses lower monthly payments.
NOTE: If your objective is to raise cash or increase your income and you have significant home equity built up, you may want to evaluate using a Reverse Mortgage instead of refinancing your home.
Home mortgage refinancing is not without risk. Be careful of the following scenarios:
Increasing your loan amount when refinancing a home: If you increase the amount of your home mortgage by cashing out home equity, you increase your financial risk due to the larger debt amount and, possibly, the longer term on your loan.
Mortgage refinancing closing costs could outweigh savings: Because there are transaction costs to refinancing a home, there is a risk that if your gains from mortgage refinancing are small, these will not outweigh the closing costs on taking the new home loan.
Choosing riskier loan terms: There are innumerable ways to structure a loan and some of these strategies can leave you open to a lot of risk. For example, if you use an Adjustable Rate Mortgage or a Home Equity Line of Credit that has a variable interest rate, then your monthly payments will rise if interest rates go up.
In general, the loan process will take you through the following steps:
Step 1: Understand your needs and goals – consider both financial and quality of life issues. How long would you like to stay in your house? Will the house work for you in case of a disability? Do you want to cut your monthly expenses or generate cash?
Step 2: Gather all the information you will need, such as home value, current mortgage information, income, credit history, etc.
Step 3: Research the different loan types available in the market, and have an idea of which ones you might want.
Step 4: Speak with at least three different lenders to get advice on loan structure and competitive rate and terms quotes. Decide on which lender, structure, and terms works best for you.
Step 5: Complete paperwork. Once you've been approved, you and your mortgage lender will:
Have your home appraised.
Set a closing date and location.
Review the Good Faith Estimate and other closing documentation prepared by your mortgage lender. This helps you anticipate costs that might be due at closing.
Arrive at the closing, where you will need to provide any outstanding information and sign your loan papers. At that point, you may also need to bring a certified or cashier's check for any closing costs that are your responsibility. This meeting generally takes less than one hour. Often, when you refinance, your closing costs are included in the total loan amount so you won't be expected to pay these fees out of pocket.
Once the loan papers have been signed, the "period of rescission" begins. You have three business days to decide whether to proceed with the loan. After that, the funds are released by the mortgage lender and your loan is complete. If you're receiving cash at closing, this is when your check will also be released.
It just seems logical that it would be easier and less expensive for your existing lender to refinance your home. After all, the lender knows both your payment history and the property.
The lender may not need a new property appraisal, a title search or other items that would normally be required on a new loan. The lender should also be willing to offer a better price because it's easier to keep a good customer than it is to find a new one.
The holy grail of refinancing is when the lender just reduces your interest rate and doesn't require you to close on a new loan. This can only happen if you are just rolling your existing balance and aren't looking for a cash-out refinancing.
So, why doesn't it happen more often? The problem is that the mortgage market is divided into three lines of business: mortgage origination, mortgage servicing and mortgage lending.
If the firm that originated your existing mortgage didn't retain the servicing, you aren't a current customer. If the firm servicing the mortgage doesn't do originations in your market, then they may not be interested in your business.
Finally, mortgage investors are looking for packaged or securitized mortgages that are part of a pool of mortgages, so they aren't interested in your stand-alone business.
Ask your current servicing provider what cost savings they offer to current customers who refinance with them. You also need to find out what terms competing lenders offer.
Saving a few hundred dollars in closing costs doesn't mean much if you can get a lower interest rate from another lender. Shop rates on claritylifeins.com before talking to your current servicing provider, so you will be able to recognize a good deal and use claritylifeins’s refinancing calculator to determine your refinancing savings.
If you are going to apply at several lenders, you should do it within a 30-day period. Your credit score won't be hurt by comparison shopping for a mortgage if you concentrate your applications within this time frame.
That's because Fair Isaac Corp. (the company that works with the credit reporting agencies to provide your credit score to lenders) considers these multiple mortgage inquiries as one inquiry when calculating your credit score.
The annual percentage rate adjusts the mortgage interest rate to reflect estimated closing costs, including points paid at closing and mortgage insurance.
The Truth in Lending Act requires lenders to provide the APR when advertising a mortgage loan and provide prospective borrowers with the loan's APR upon request. APRs aren't perfect, since closing costs are estimated and the lender can round off by up to a quarter-percent.
In general, neither the lender nor anyone else may charge you a fee until you have received this information. The Federal Trade Commission has a mortgage shopping work sheet that can help you lay out the costs associated with several loans and identify the loan that is best for you.
claritylifeins also provides you with an estimate of a loan's APR when you search for mortgage loan rates.
With so much refinancing taking place, you need to have confidence that your lender will be able to complete your loan origination in a timely and efficient manner. Ask the lender
Restructuring your debt load to pay off your car loan with mortgage debt can make sense if: (1) you can use the mortgage interest deduction on your taxes; (2) the after-tax rate on the mortgage loan is less than the interest rate on the car loan; (3) there isn't a prepayment penalty on the car loan; and (4) you have sufficient equity in your home that borrowing the additional $27,000 won't cause you to pay private mortgage insurance on the mortgage debt.
There are some drawbacks. Paying off your car over 15 to 30 years will negate any savings from a lower interest rate, not to mention the debt hangover you'll have when you go to buy your next car and you're still paying off the old one.
Both auto loans and car loans are secured loans. If you don't make your car payment, the lender can have your car repossessed, but if you don't make your mortgage payments the lender can foreclose on your home.
When deliberating about whether to take this step, look at the refinancing as a stand-alone decision. Does it make sense to refinance to capture an interest rate 1.25 percent lower than your current mortgage? It may not if you only plan on being in the house for a few years and closing costs are expensive.
claritylifeins’s refinancing calculator will help you determine how long it will take you to recoup your closing costs from the lower monthly mortgage payment.