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Millions of homeowners in the United States are stuck with a mortgage they can barely afford and that is worth more than the property. Worse still, many of these mortgages are based on a variable interest-rate and could increase at any moment and force their owners into foreclosure. To help these cases the government has set the Short Refinance Program. It is designed for homeowners who can afford their current mortgage payments but do not qualify for a mortgage refinance because their home is underwater.
Does a Refinance Make Sense For Senior Homeowners?
This is a good question for all homeowners, not just seniors. However, seniors are in a specially vulnerable position because their income may be reduced if they retire. Seniors who are already retired, often have a fixed income and their capacity to adapt to an increase in mortgage payments is small. For these reasons, a mortgage refinance may be especially advantageous for seniors.
To illustrate, if you refinance your current $150,000 mortgage with a 5.5 percent interest rate for a fixed-interest rate of 4.25 percent, you will achieve two things. First, you will reduce your yearly mortgage payments by $1,800 and, second, you will guarantee your mortgage payments don’t change in the future when your pension or retirement savings are the only income you have.
However, this does not mean a refinance always makes sense. There are two main issues you should look at carefully. One, what is the cost of refinancing and how long it will take to recoup the costs. Two, how much do you have left on your mortgage.
COST OF REFINANCING
Refinancing can save you thousands of dollars but, as is often the case, it takes money to make (or save) money. The cost of refinancing a mortgage ranges from 3 to 6 percent. On a $200,000 mortgage that represents anything from $6,000 to $12,000. Before even considering a mortgage refinance you must look carefully at the savings you make. If it is going to take five years to recoup your refinance costs and you are planning to sell the house in five or less years, refinance may not be a good idea.
TIME AND INTEREST
The second issue to consider is how long you have left on your mortgage. When you start paying a mortgage most of your payments go to paying the mortgage’s interest. The longer you have been paying a mortgage the higher the percentage of your payments that goes towards reducing your mortgage balance. If you restart your mortgage with a 30-year loan and you only had 15 years left, it is unlikely the savings from your refinance will cover the cost of paying interest for 15 years more. Another option is to refinance your mortgage for a shorter refinance to offset the cost of restarting the clock on your mortgage.
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