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.