Recent estimates from economists say that around 40 percent of seniors over 60 still have a mortgage today. In fact, it is now not uncommon to find retired Americans grappling with their housing debt. As consumers either opt for extended mortgage terms or get into the home buying process much later in life, many are finding themselves approaching retirement with a mortgage in tow. More Americans are also capitalizing on the current low-interest rates to either refinance their homes or apply for a mortgage later on in life. Whether you are already retired or planning to retire soon, adding a mortgage payment to your retirement budget can come with its challenges. The good news is that there are now more options for senior homeowners than there were before, and with a bit of research and financial discipline, managing a mortgage during later life is possible.
Check If You Can Refinance To Lower Your Payments Or Interest Rate
With interest rates low right now, retirees can take advantage of refinancing to reduce their mortgage payments. This has one huge advantage: it makes a mortgage more manageable on a retirement income. Refinancing also comes with its own set of challenges. It may extend your mortgage term and end up costing more in interest in the long term.
The key to getting it right is to assess whether you will save money before signing that refinancing paperwork. Also, using pre-approval checks from home loan experts and brokers can give you a glimpse of pre-approved rates, and refinancing would leave you in a better financial place. You will also need to pay another set of closing costs if you choose to refinance. If you have other pressing financial goals like putting money towards retirement costs, refinancing your mortgage for a longer term may hinder that.
Choose A Lender Who Allows The Use Of Social Security Or Retirement Assets
Lenders will consider all of your income sources in your mortgage application. This includes any retirement income like Social Security payments. Lenders will also take into account retirement assets like your 401(k) and investment income if you're already retired. If the total of your monthly income in retirement, including your Social Security payments, can cover your mortgage payments, then you stand a good chance of being approved.
Keep in mind that you will still need to satisfy the other criteria, such as having an acceptable credit score and debt levels. If you want to speak to your lender about including your retirement assets and Social Security payments in their calculations, include a copy of your benefits letter in your application. Ensure that it states the amount you receive each month and the period you are entitled to it.
Work On Reducing High-Interest Debt Heading Into Retirement
The federal law protects you from age discrimination when applying for a mortgage. Whether you're applying for a new mortgage, refinancing, or seeking a home improvement loan, lenders are not allowed to ask about age on your application. Instead, they should consider factors like income, debt to equity ratio, and credit score in their mortgage decision. The Federal Trade Commission website also states that lenders must consider income from reliable part-time employment, pensions, and Social Security in their calculations.
However, since lenders will be scrutinizing your outstanding debt balances and income levels (which can fluctuate greatly in retirement), it makes sense to eliminate as much of your high-interest debt as you can before applying. If you are just preparing for retirement, you may want to focus on credit cards, payday loans, and outstanding debt with promotional rates. This helps you in several ways: it reduces your debt to income (DTI) ratio, improves your credit score on file, and it reduces the amount of money you are paying to interest charges each month.
Finally, seniors may want to think of their long-term options for paying off their mortgage. If you have a substantial number of years left on your mortgage (or are taking a new one), it may be time to weigh your ability to keep paying your mortgage in the next ten years against the alternatives for paying it off. For instance, if you need to, you could make a withdrawal from your 401(k) to pay off your home loan. But that comes with its own set of tax implications.
Having a mortgage in later life can also have its perks. Instead of paying off your outstanding loan balance, carrying a mortgage leaves your savings free for other costs of retirement - and gives you peace of mind. If you follow a few simple tips, you can balance financing a home and your retirement at the same time.