A Guide to Senior Mortgages
Everything You Need to Know About Mortgages for Seniors
Seniors who want to simplify their lives during retirement often downsize or take advantage of home equity. Fortunately, you don’t need to buy a new property with cash just because you live on a fixed income. In fact, you could qualify for a mortgage, provided that your finances meet the necessary requirements. You may also qualify for a Home Equity Line of Credit (HELOC) or reverse mortgage to use your existing home equity as a way to pay your bills.
But how do you know if a mortgage is the best solution for you? And which mortgages are the best for seniors? Finally, how can you qualify for a mortgage in retirement? In this guide, we will answer all of these questions and help you decide if a mortgage is right for you and your family.
Reasons Seniors May Need a Mortgage in Retirement
There are a number of reasons to consider a mortgage in retirement. Some of the most common benefits include:
- Buying a new home: If your home is too large for your needs or you simply want a change of scenery in retirement, you can take out a mortgage to pay for a new home. Seniors commonly take this route when they want to downsize, as this can make homeownership more manageable and affordable. Not only can downsizing put cash in your pocket now, but it can also reduce your ongoing expenses.
- Reinvesting your equity: Even when your fixed income is enough to live comfortably, you may want to find ways to reinvest funds during retirement to increase your future returns. If you believe that your home value is unlikely to appreciate substantially, you may want to reinvest your equity in different investment vehicles. This can also allow you to turn your equity into a sustainable income source. Just remember that there is no guarantee your new investments will outpace the growth in your property’s value, and investments of all kinds are inherently risky.
- Qualifying for better loan terms: For seniors who are still paying off a mortgage, refinancing is a great option to potentially get lower monthly payments, reduced interest rates, or better loan terms in general. Low monthly payments are one of the most common reasons seniors choose mortgage refinancing, as lower payments make it easier to stick to a sustainable budget on a fixed income.
- Paying your bills: Most seniors live on a fixed income. Though Social Security keeps pace with inflation, other revenue sources may not. As a result, it can become increasingly difficult to maintain the lifestyle you want to live as you get further into retirement. Various mortgage options, particularly reverse mortgages, exchange your home equity for cash to help you stay in the same home and have funds to supplement your retirement income as needed.
Types of Mortgages for Seniors
Different mortgages can fulfill unique goals for older adults. You may qualify for some types of mortgages and not others based on your financial qualifications and housing circumstances. Let’s take a look at some of the most useful types of mortgages for seniors.
Home Equity Loan
A home equity loan is a second mortgage that lets you borrow against your home’s equity. While this will cause you to lose equity in your home, you will get a lump sum upfront that is paid back in installments. Like a first mortgage, a home equity loan allows you to accumulate equity in your home over time. This is a good option for older adults who have substantial equity in their homes and need cash to pay for immediate expenses.
A Home Equity Line of Credit is a revolving line of credit taken out against the equity in your home. Rather than getting a lump sum all at once, you can choose to take out funds as needed. These funds are taken from your home equity and converted into a conventional loan after a set period (typically 10 years).1
Did You Know? A HELOC can be terminated by the lender under adverse economic conditions, so you should only apply if you are sure that you can pay the closing costs and annual fees.
During the initial withdrawal period, you can take out funds and choose to only make payments on the interest of the loan. Once the withdrawal period ends, the HELOC converts to a conventional loan and you will need to make payments on the principal balance plus interest. This mortgage option is best for those who anticipate requiring funds in the future and want the freedom to only take out as much cash as they need.
A Home Equity Conversion Mortgage is the only kind of reverse mortgage backed by the U.S. government. It is specifically designed for seniors, as you must be at least 62 years old to qualify. This program is managed by the Federal Housing Administration (FHA) and allows you to withdraw a portion of your home’s equity in cash.2
An HECM can be used to pay bills or even purchase a new home. Either way, an HECM is one of the best ways to get a reverse mortgage for seniors, as it often comes with lower fees than a non-FHA reverse mortgage. We spoke to Steve Irwin, President of the National Reverse Mortgage Lenders Association, about applying for the HECM program:
“The advantage of using this program is that the new home is purchased outright, using funds from the sale of the old home or private savings and other sources of income, which are then combined with the reverse mortgage proceeds. This home buying process leaves you with no monthly mortgage payments.”
A cash-out refinance creates a new mortgage on your home, often with better terms. You can also take out any remaining portion of your available equity as cash. This kind of refinance is best for older adults who want to consolidate debt, get lower interest rates or monthly payments, and have extra cash on hand to pay bills. However, a cash-out refinance also means that some of your existing equity will be erased, which could make it harder to qualify for loans in the future.
Pro Tip: Looking for ways to save in retirement? Visit our guide to senior discounts and our frugal living tips.
Conventional loans allow older adults to qualify for new loans through private lenders. These are typically best for seniors who have existing mortgages and want to buy a new home. While lenders are not allowed to use age as a factor when reviewing a loan application, your credit history and finances will be evaluated. It may be harder to qualify for a conventional loan on a fixed income, especially since most lenders require a standard 20 percent down payment on top of closing costs.
A reverse mortgage is designed to help seniors take advantage of their home equity without increasing monthly expenses. With a reverse mortgage, you take out a loan that is secured by your home equity. Reverse mortgages do not require monthly payments, but they accumulate fees and interest over time. The loan is only paid off once you no longer live in the home. For this reason, reverse mortgages are only available to people aged 62 or older who have at least 50 percent equity in their homes.
FYI: One of the best forms of consumer protection against reverse mortgage scams is to meet with a HUD-approved housing counselor to answer your questions and discuss alternative options beforehand.
Reverse mortgages are best for older adults who need extra cash to pay for expenses but do not want to move or downsize. With a reverse mortgage, you can keep your home and exchange your home equity for cash without having to make monthly payments. You are also protected against taking on too much debt with a reverse mortgage, as you will never be required to pay back more than the fair market value of your home, even if the principal balance of the loan exceeds this amount.
It’s important to remember that a reverse mortgage is not just free money. It is a loan that increases in size over time, steadily taking away from your home equity. Either you or one of your heirs will be required to pay off the loan, typically by selling off the property. You should also consider the tax implications of a reverse mortgage. You are required to keep up your property tax payments to maintain your reverse mortgage without penalty. If you default on your taxes, your home could be foreclosed. Additionally, you cannot deduct the interest from your taxes until the loan is paid off, which could mean that you will never personally take advantage of the tax benefits (though your heirs might).
Can I Qualify for a Mortgage in Retirement?
The short answer is yes, you can qualify for a mortgage in retirement. Lenders will typically look at your Social Security income and any other retirement income to evaluate your ability to make mortgage payments (if applicable). You can also use any assets to help you qualify for a loan.
From The Pros: Always consult with family members and trusted advisors about your long-term financial goals and living arrangements before taking on a new mortgage in retirement.
Most of the qualifications for a mortgage in retirement are the same as they are for working individuals, including standard credit requirements. Proof of income is one of the few exceptions. Since retirement accounts typically depreciate in value once you retire, you will need to show proof that these accounts can provide you with income for at least three years to qualify for a mortgage in retirement.
You should try to have a credit score of 640 or higher, a debt-to-income ratio (DTI) of no more than 43 percent, and sufficient income to make monthly mortgage payments. Fixed retirement incomes can make it a little more difficult to qualify for conventional loans, which is why many seniors choose to refinance or get reverse mortgages with no monthly payments.
FYI: Still trying to establish or work out some kinks in your retirement plan? Visit our guide to retirement planning for tips.
Tips for Refinancing in Retirement
Refinancing during retirement may look a little different, as your income is likely not as high as it was when you were working. This is why it is generally advisable to refinance before you retire. When you’re working, you are more likely to qualify for the best interest rates and repayment terms. That said, you can still refinance your mortgage during retirement. Just be sure to keep these tips in mind:
- Make sure the benefits outweigh the costs: Refinancing typically requires you to pay the closing costs on your new loan. If you can’t reduce your interest rate or lower your monthly payments enough to justify the upfront costs, refinancing won’t be worth the trouble.
- Improve your credit before applying: Make sure that your credit is in great shape if you want to refinance during retirement, especially since you’ll need to make up for having a lower fixed income. Before you apply, work to pay down your debts and improve your credit as much as possible. This way, you can qualify for the best possible terms and interest rates.
- Consider the type of refinancing you need: You’ll need to decide what kind of refinancing is best for you. A conventional refinance will simply replace your old mortgage with a new one, ideally with lower monthly payments or interest rates. Alternatively, you may want a cash-out refinance to get the added benefit of exchanging part of your home equity for cash.
If you’re an older adult considering your mortgage options, you can benefit from various programs and lending solutions. From FHA-backed reverse mortgages to cash-out refinances, you can use your home equity to improve your financial standing and make it easier to live comfortably. Just make sure to research any mortgage offer thoroughly before making a decision.