NO PLACE LIKE HOME New Strategies for Homeownership in Retirement
W hen you leave the workforce and can no longer rely on that regular paycheck, income planning becomes incredibly important. Your ability to enjoy your dream retirement depends on your income stream strategies during your retirement years. Meeting these goals frequently demands creative solutions. Often, these solutions can be found through homeownership. If you’re looking for ways to save or get a little extra money in retirement, here are five important strategies to keep in mind. Refinancing Refinancing your mortgage loan to a lower interest rate can greatly reduce your monthly debts. Depending on how low the new interest rate is, some retirees are able to save hundreds of dollars each month after refinancing. That said, refinancing your home isn’t as easy as making a quick phone call. You need to have a strong credit score and enough monthly income to afford the new mortgage payment. But first, you need to be certain that refinancing is the right option for you. Lenders tend to avoid refinancing existing mortgage loans into other 30-year fixed-rate loans for retirees. If you’re thinking about refinancing, expect at most a 15-year fixed-rate loan. With the shorter
If you plan on selling your house during retirement, refinancing might not be the best option. HELOC/HEL As you pay down your mortgage and the value of your home increases, the equity of your home increases. You can access this equity by selling your house or by borrowing against the equity of your home with a home equity line of credit (HELOC) or a home equity loan (HEL). Both a HELOC and an HEL give homeowners access to cash based on the equity of their home. However, they operate very differently. A HELOC works like a credit card, giving homeowners a line of credit for a set period of time. During this draw period, you can withdraw money whenever you need it. By paying off the principal, your credit revolves, and you can use it again. For example, imagine you have a $10,000 HELOC and you borrow $5,000 for home repairs. If you pay back $3,000 without withdrawing more, you have $8,000 in credit. An HEL is a one-time lump sum that must be paid back over a fixed term at a fixed interest rate with equal monthly payments. While less flexible than a HELOC, the interest rates for an HEL tend to be lower.
lower your monthly mortgage payments? When borrowers make a large lump-sum payment to the loan principal in exchange for lower monthly payments, this is called “recasting a mortgage.” There’s a big difference between recasting and refinancing a mortgage. Most homeowners find recasting easier, because it requires just a lump sum of money in exchange for lower monthly payments. You keep the existing loan and current interest rate but adjust the amortization. For example, if your 30-year mortgage has a principal balance of $200,000 with a 5 percent interest rate, you’ll pay approximately $1,200 a month. If you spend $50,000 to recast the loan plus a $250 recasting fee, you end up saving almost $35,000 in interest payments over the course of the loan. Additionally, your monthly payments will drop by approximately $300. Recasting can be great for reducing monthly payments, but it’s not always the best choice in the long run, especially if you have a higher interest rate. In addition, the money you use to recast your house won’t be available for other needs. Finally, many lenders offer recasting and others do not. So, it doesn’t hurt to ask. HECM (Reverse Mortgage) If you are 62 years of age or older, you may be able to meet your retirement goals by taking advantage of a federally insured home equity conversion mortgage (HECM). Also called a “reverse mortgage,” an HECM is similar to a home equity loan, as it allows retirees to convert the equity of their homes into cash. Houses and most condominiums qualify, as do many homes with existing mortgages. The difference is that the borrower can pay as much or as little as he or she determines. In fact, the borrower can even defer repayment entirely. As long as you comply with the terms of the loan, an HECM doesn’t need to be repaid until the last surviving borrower (or a qualified non-borrower spouse) passes away,borr passes away,
time period, your monthly payments will likely be higher.
Deciding between a HELOC or HEL depends on your financial needs. If you
need a large amount of money one time — for
Make sure the decrease in the interest rate will
example, to spend $10,000 for a new
be enough to save money each month and outweigh the higher payments.
roof — an HEL may be the way to go. However, if your financial needs will be extended over a period of time, you may need the line of credit a HELOC offers.
There’s also a cost to refinancing. The Federal Reserve Board estimates it costs from 3–6 percent to
Recasting Let’s say you find yourself in a situation where you have extra cash on hand. Most people start planning an extra vacation, but what if you could use that money to
refinance an outstanding loan balance. If you owe $60,000 on your mortgage, your refinance fees could be anywhere from $1,800–$3,600.
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