Cash-strapped in retirement? Refinancing might help.
Recently mortgage rates dropped to their lowest rates in history. At the moment, rates are sitting at an amazing 3.25% to 3.75% for a 30-year fixed mortgage. For anyone still holding on to high-interest debt—including retirees—this is great news. Surprised to hear the word “retiree” in that statement? You’re not alone. Common wisdom has long held that retirement is not the time to rework debt, but today’s low-interest rates are anything but common, and in some cases they can be the welcome bearer of financial opportunity. That was certainly the case for Martha.
When Martha was widowed 10 years ago, she bought a townhome in a senior-citizen community that was closer to her son and grandkids. Just 58 years old at the time, she was still working and could easily afford her mortgage, car payment, and other expenses on her salary. When we met last week, however, we had some new challenges to tackle. Now 68, Martha was unwittingly thrown into full retirement when she was laid off from her job last year. Without a paycheck, her monthly income has been reduced significantly to $2,850. She’s receiving $1,750 from Social Security, $100 from her pension, and $1,000 after-tax net from an IRA withdrawal, but with a mortgage payment of $750, plus Homeowners Association (HOA) fees of $250 a month and a $175 car payment, her expendable income is very limited, to say the least.
When I first mentioned the idea of refinancing to Martha, she was surprised. “I didn’t think I could qualify now that I’m retired. Is it really possible?” I assured her that as long we could verify her income, refinancing was very possible—even if that income is coming from retirement savings rather than a salary. Working together, we came up with a great plan that puts today’s interest rates to work for Martha’s cash-strapped situation. Here’s how we did it:
The interest rate on Martha’s $100,000 mortgage is currently at 4.375%, and she owes $6,000 on her car. We started by seeking a new mortgage rate of 3.25% to 3.73% to immediately reduce her biggest monthly payment.
Choosing the lowest available rate didn’t make sense since the closing costs were quoted at $3,500, which would take a couple of years to pay back. To combat the challenge, we shopped around and were able to get a $107,000 loan at 3.625%, with low closing costs of only $1,000.
To verify Martha’s income, the lender requested an income verification letter from Guerin Financial stating the likelihood of being able to withdraw $1,000 a month from her IRA for many years to come.
To add to her monthly net income, we used the new mortgage to pay off her car loan. This put an additional $175 a month in Martha’s pocket.
We rolled Martha’s closing costs into the refinanced amount to eliminate out-of-pocket costs associated with the refinance.
By reducing her mortgage interest rate from 4.375% to 3.625% and eliminating her car payment, we were able to reduce her monthly payments by $265 a month, or $3,180 a year.
To sweeten the deal, assuming she closes in August, her first payment won’t be due until October, saving her an additional two months of mortgage payments, totaling $1,500.
The new plan makes it financially possible for Martha to stay in her townhome for much longer, and the cash savings will improve her quality of life.
If you’re in retirement now and paying 4% or more on an existing mortgage, refinancing may be a good option to help lower your monthly payments and eliminate other high-interest debt. Be sure to keep these tips in mind and, of course, work with your financial advisor to be sure refinancing is the right choice for your specific situation:
Keep your eye on interest rate changes to take advantage of the current environment.
Don’t limit yourself to refinancing your mortgage. Including a Home Equity Line of Credit (HELOC), a car loan, or other high-interest debt may save you even more money.
Shop different lenders and compare quotes. Martha’s lender was flexible with how we structured closing costs with the interest rate. A lower rate of 3.5% would have increased her closing cost by $1,000, so we opted for the slightly higher rate.
Be sure you can verify your income. Income verification can be tricky for retirees. Consult your financial advisor to decide whether you can support income requirements and to help with the income verification process.