Refinancing on a fixed income can be challenging, but it isn’t impossible. Though there is no federal refinance program available only to seniors, there are many options that can help you reduce your interest rate or monthly payment.
We’ll look at ways that, as a senior, you can refinance your loan. We’ll also give you a few tips for improving your chances of refinancing on a fixed income. Finally, we’ll introduce you to a few programs you can use to refinance your loan or take cash out of your equity.
How To Apply For A Refinance On A Fixed Income
What happens when you refinance your mortgage loan? You replace your current loan with one that’s more manageable. You can refinance to get a lower interest rate, reduce your monthly payment or take cash out to cover debt. A refinance can mean the difference between staying in your home and foreclosure.
The refinance process begins with an application. You don’t need to refinance with your current lender – you can submit an application through your lender of choice. Your lender will usually ask you for documentation that proves your income. This can include statements detailing your Social Security benefits, tax returns and any statements from your retirement accounts.
During underwriting, your lender will verify your income and make sure you meet the standards for a refinance. Your lender will also schedule an appraisal to ensure your home hasn’t decreased in value. After all your paperwork clears and your appraisal comes back, you’ll sign on your new loan at closing.
Living on a fixed income can make it more difficult to qualify for a refinance. Lenders need to know that you have enough money to cover your monthly payments. They also need to know that if you run into financial hardship, you have enough in savings to continue making your payments. Luckily, there are a few steps that you can take to improve your chances of qualifying for a refinance.
Increase Your Chances Of Getting Approved
Make sure you maximize your chances of approval before you apply for your refinance.
Start With Your Current Lender
You may have an increased chance of getting a refinance with your current lender since they will already know the details of your loan. Your lender may be able to suggest a refinance solution you qualify for, and may even be able to loosen the requirements to refinance in some circumstances if you’re current on your mortgage payments.
Include All Your Income
Your lender will ask you questions about your income and assets when you apply to refinance your loan. However, lenders don’t only consider income from employment when they review your application. Maximize your chances of getting a refinance by including all streams of income with your application. Some income your lender might consider includes:
- Social Security payments
- Structured settlement payments
- Dividends from stocks and other investments
- Alimony payments
- Military pension payments and benefits
- Income from rental properties you own
- Payments from your IRA, 401(k) or other retirement accounts
- Royalty income from patents
The specific streams of income you can include in your application can vary from lender to lender. The most important factor is that the income you have is set to continue consistently. Your lender may exclude certain streams of income that aren’t long-standing. For example, your lender probably won’t consider alimony as income if it is set to end in 12 months.
Maximize Your Appraisal Value
The appraisal is an important part of the refinancing process. During an appraisal, an appraiser will tour your property and give you an estimate of how much your home is worth. Lenders require appraisals because the appraisal assures your lender that they’re not loaning out more money than your home is worth. Maximizing your appraisal value can increase your chances of qualifying for a refinance. This is especially true if you want to take cash out of your equity.
Use these simple tips to increase your home's value before your appraisal:
- Increase your curb appeal. Your curb appeal has an impact on the value of your home. Take a tour of the exterior of your property and see where you can make improvements. Paint fencing, plant flowers and power wash walkways and hardscaping to maximize curb appeal.
- Declutter. Your appraiser won’t deduct points if you haven’t done the dishes or you have a few books lying around. However, decluttering your home can make your rooms look larger and make your home feel more comfortable. Take a walk through each room a few days before your appraisal and make sure that everything is clean.
- Create a list of upgrades. Permanent upgrades you’ve made to your home increase your appraisal value. Create a list of them and give it to your appraiser. Some examples of permanent upgrades include installing a home security system, replacing old appliances and adding a pool. Don’t include removable or aesthetic upgrades like painting a bedroom, putting up wallpaper or hanging mirrors.
Mortgage Options For Seniors
Now that you know how to increase your chances of a successful loan application, let’s take a look at a few options you can use to manage your mortgage.
Rate And Term Refinances
Are you having trouble making your monthly payments? You may want to consider a rate and term refinance. When you take this option, you change your interest rate, the amount of time you have to pay back your loan, or both. Your monthly payment will go down if you take on a lower interest rate or a longer mortgage term.
For example, let’s say you have a mortgage loan with $50,000 in principal remaining, a 4% interest rate and 10 years that remain on your term. Your monthly payment in this example would be $506.23 before taxes and insurance. What happens if you refinance your loan to a 15-year term and keep the same interest rate? Your monthly payment would be $369.84. Plus, you can save even more if interest rates are lower now than when you bought your home.
Keep in mind that refinancing to a longer term means you’ll pay more in interest. It can also mean that it’ll take longer to fully own your home. Leaving an outstanding mortgage balance when you pass away can also interrupt any plans you have in place to leave your home to an heir.
You probably have sizeable equity in your property if you’ve been living in your home for a while. Equity is the percentage of your loan’s principal you’ve paid off. It’s also the percentage of your home that you own outright. You can access your home’s equity with a cash-out refinance.
You accept a loan with a higher principal balance when you take a cash-out refinance. In exchange, your lender gives you the difference in cash. This can be useful if you have a large amount of debt you want to pay down quickly.
Let’s look at an example: Let’s say you incur $20,000 worth of credit card debt. Let’s also say you have a home loan with $50,000 remaining on your principal and $100,000 worth of paid equity. Your lender gives you a loan worth $70,000 and pays you $20,0000 in cash after closing. You then make payments on your new loan in monthly installments – just like your previous loan.
Cash-out refinances can be useful if you’re a senior because you’re likely to have more equity in your home. However, remember that you’ll pay for the money you take out in interest over time. Never use a cash-out refinance for everyday living expenses, as this can quickly lead to a cycle of more debt than you can handle.
A reverse mortgage is a special type of mortgage for seniors aged 62 and older that can help you cover ongoing living expenses. To qualify for a reverse mortgage, the home must be your primary residence.
A reverse mortgage begins when you convert part of your equity to pay off your existing loan. You no longer have to pay on your original loan after you finalize your reverse mortgage. You still own your home and you remain on the home’s title. From there, your reverse mortgage lender will pay you any remaining proceeds from your new loan. You can get your money in a number of ways, ranging from monthly installments to a single lump sum or even a combination of both.
You decrease the equity in your home every time you receive money in a reverse mortgage. This increases the amount of debt you have. The loan is due when you die, sell your home or otherwise move out. Reverse mortgage lenders also charge interest on what you borrow.
Keep in mind that you still have upkeep obligations even after you remove your monthly mortgage payment. You must continue to do home maintenance, pay your property taxes and cover your insurance expenses. Your reverse mortgage lender can cancel your agreement and potentially foreclose on your property if you fail any one of these requirements.
We do not offer reverse mortgages at this time.
Home Equity Loan
A home equity loan allows you to access your home’s equity with a lump sum. A home equity loan is not a refinance. Instead, you take out a second mortgage against the equity you have in your home. You make payments to your lender each month after you receive your money. These payments are in addition to the monthly payments on your original loan.
Home equity loans can be useful if you need to cover a large expense and interest rates are higher now than when you took your loan. However, make sure that you can handle both monthly payments before you get your loan. Rocket Mortgage® does not offer home equity loans.
Home Equity Line Of Credit
A HELOC is similar to a home equity loan but instead of getting your money in a lump sum, you gain access to a revolving line of credit against your equity. For example, if you have $50,000 worth of equity in your home, a HELOC might give you a credit line with a limit of up to $45,000.
All HELOCs begin with a draw period and you can use your line of credit and spend against your home equity. You also only need to pay for any accumulated interest during the draw period. Once the draw period ends, you pay back the balance on your HELOC in fixed monthly payments. These come in addition to any mortgage payments you make each month. Make sure that you can make your payments before you take a HELOC. Rocket Mortgage® does not offer HELOCs at this time.
Refinancing on a fixed income can be challenging – but it isn’t impossible. A refinance can help you unlock a lower monthly payment, help you own your home sooner or lower your interest rate. Make sure you include all of your income when you take a refinance. You can also improve your chances of a refinance by sticking with your current lender and maximizing your appraisal value.
Refinances aren’t your only options for managing your loan. A reverse mortgage, home equity loan or HELOC can also help you manage your household expenses. It’s important to note that Rocket Mortgage® does not offer home equity loans or HELOCs at this time. Carefully consider both the benefits and drawbacks of each solution before you apply.
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