With mortgage rates at historic lows, many home owners are refinancing mortgages. But for many, this seems to be an impossible task. There are many questions that need to be answered to see if you can qualify. Questions such as who owns the mortgage? What is the value of my house? What is my credit score? What is my income? These are just a few to get started. The unfortunate reality is that many home owners have been pushed out of the refinance market today due to lower income, especially the retiree.
If you are in retirement, unless you have a steady income, you may have fewer options to refinance. What we are finding today is that a steady income is more important than ever. Before the real estate and financial collapse in 2008, many home buyers were able to get a mortgage with little proof of income. In many cases, it turned out, that these homes truly were not affordable. So it makes sense that someone should have enough income to support a mortgage.
Now let’s look at the retiree
Often retirees have less income, but may have a large asset base to draw from if needed. When applying for a mortgage their income may not be enough to qualify for the mortgage. Common sense would tell us that if you have a mortgage with a higher rate and you can afford the payments, a lower payment from a lower interest rate mortgage would be affordable. But common sense is not often part of the underwriting process. The pendulum has swung completely to the other side. Years ago, the banks gave money to those who couldn’t afford it. Today, many who can afford it can’t refinance. Even if you have investment accounts that you can draw from, the lack of income may make refinancing difficult or near impossible. Many retirees no longer have pensions that pay them a fixed monthly income. Or they chose to role the pension into an IRA when they retired. If you are collecting Social Security, that may not be enough income to qualify as well.
What to do
Some creative planning may allow you back into the refinance camp. One strategy includes your IRA accounts. Even though you don’t have to take distributions from your IRA’s until 70 1/2, you may consider starting distributions earlier. By taking a steady amount each month, you can show that you have a monthly income. You will pay tax on the distribution, but the savings from a lower monthly mortgage payment may make it worthwhile. Another strategy may be to start taking income from your taxable portfolio. If you are reinvesting your interest and dividends, start taking the distributions in cash. Have them transferred to your bank account so you show income being received. A third strategy is to work part time. Income is income and if this will help to refinance it may be worthwhile.
A final strategy is to not wait until retirement. If you plan retiring soon, refinance now, while you have the income. Or if you plan on moving in retirement, now may be the time to make the new home purchase.
There are options if you are creative. Speak with your banker or mortgage broker. Include your CERTIFIED FINANCIAL PLANNER™ practitioner from the Financial Planning Association in the discussions. Together, you may come up with a winning strategy.
FPA member Scott M. Kahan, CFP®, is president and founder of Financial Asset Management Corp., a fee-only Wealth Management firm in New York City.