Refinance & Mortgage Guide for Senior Citizens
This guide has been created with the sole purpose of guiding the older members of society and senior family members through the sometimes cumbersome process of purchasing and maintaining real estate. Whilst aimed at a specific demographic, this guide is freely accessible to anyone and everyone looking to get informed on the steps and processes involved in getting onto the property ladder.
By the end of this guide, you should have a basic understanding of the following:
- The advantages and disadvantages of buying a home
- Keys steps in the buying process
- Options available to you
- The facts
- Finance & Legal Aid
- Key resources available to you
- Final tips & Warnings
Senior citizens are often in a difficult situation when it comes to obtaining mortgage financing or refinancing an existing loan. Living on a fixed income while the costs of everything else skyrockets is difficult. Older persons usually have increasing medical expenses to pay, and often they must choose between paying for bills, food and housing with little or no extra cash. If their home is not fully paid off, a mortgage payment and rising tax bill can take well over a third of their income. Many look to their mortgage or home equity for a solution, and they begin to consider either changing their existing mortgage or finding a home equity loan. Age is not necessarily a deciding factor, but many seniors may assume that it will be a problem. For most purposes, being age 62 defines the lower limit of what qualifies as a “senior” for the lending industry.
Chapter 1 – Historical Overview
The history of lending to senior citizens is constantly evolving. Formerly, many seniors owned their homes outright and only needed to be able to pay local taxes. Rising taxation and other prices on all fronts is now pressuring senior citizens just like everyone else. Many seniors are only part of the way through hefty 30-year mortgage commitments. As their income falls over time and remains fixed, paying those bigger loan payments becomes difficult. There is no control over the yearly tax bills, and if they fall behind on taxes, their home could be up for foreclosure.
Today, a very popular option that is well publicized is the offering of a reverse mortgage. The reverse mortgage is an opportunity for seniors to remain in their homes and get a monthly payment derived from the equity they have in their home. These mortgages can be as lengthy as 30 years in term, with no payoff required unless the home is sold or the borrower dies. At the end of the term, however, the home then belongs to the bank, which could present a problem for a senior who outlives their reverse mortgage. Without that income from a reverse mortgage, the senior may discover that they can no longer make rental payments to continue to remain in the home, and a new mortgage would be out of the question with no financial backup or income.
Seniors can qualify for many types of mortgages, including traditional ones, as long as they can prove that they have enough regular income. They may want to look at a mortgage that has a shorter term than a standard 30-year mortgage, and this is where pre-planning for retirement can be very helpful to reduce stress about living expenses. Pre-planning is important also because some loan terms have specific time sensitive requirements for qualification. Examples of this would be any requirement that a home be of a certain type, or to have been owned for a specific period of time. It is never too early to investigate senior citizen mortgage requirements.
Seniors in certain geographical areas may have harder times paying mortgages. Residents of the states of Nevada, California, Florida, and other areas are highly financially stressed, according to reports from the Associated Press. Analysis of the 2007 Census data indicates that roughly a third of seniors in many areas were using at least 38% of their pretax monthly income for housing. This puts them at a level of expenses for housing where they may qualify for assistance loans or special loan modifications.
The main problem for seniors is living on a fixed income is juggling a budget that remains stable while most other expenses continue to rise. In making monthly budget decisions, items like medication or food may drop by the wayside in favor of making timely mortgage payments and other bills. In response to this, some local cities and towns are attempting to find ways to help financially pressured senior citizens. A good example is seen in Illinois, where the DuPage Country treasurer’s office is working with the State Department of Revenue to defer property taxes for seniors until they sell their homes. Other states are also trying this method to help their seniors; contact your local government to see if tax deferred programs exist locally.
Chapter 2 – Pros and Cons of Senior Citizen Mortgages
Most seniors are very comfortable staying in their own homes as long as they are physically and mentally able. They thrive in a familiar environment, and enjoy their neighbors and general surroundings. Some own individual homes where they have lived for decades. Others choose to downsize and move into a condominium, senior apartments, or other such arrangement where they retain the benefits and tax advantages of being a homeowner while remaining independent.
Problems can occur even in the midst of seemingly good mortgages when a senior is not at their best physically or mentally. Some scam artists prey on seniors, knowing that they may be able to convince or bully a senior citizen into signing a bad mortgage or scam program because the senior’s thinking is not clear due to age. Other mortgages may be good, but not for that particular senior citizen. If new payments are too high, a senior may get into a situation where they just do not have enough money to pay the new mortgage rate along with other costs that also rise due to inflation. Fees associated with new mortgages, refinancing, reverse mortgages and loans can suck up all available cash in the senior’s safety net. Some seniors would now qualify for special discounts, loan rates, and lender products. Loan modification programs are another mortgage adjustment option that is available for many lower income senior citizens.
Changing economic conditions may also have an impact upon a senior who still has a mortgage on their home. Poor economic conditions create a bad market for home sales, and a senior may find they must leave their home regardless of whether or not they can sell it. A bankruptcy may ensue, and the senior could lose any equity they may have had in a home. There is little or no control any citizen has over fluctuations in the economy and asset values that are based on external factors.
Advantages of Senior Citizen Mortgages
Major benefits for senior citizens who have mortgages are found in various areas of financial life. Here are several reasons why seniors want to maintain mortgage commitments or make new ones:
- Tax advantages and benefits – useful deductions for mortgage payments
- Making repairs and renovations – extra money would be available for needed repairs
- Remaining in their familiar home – financial arrangements can be eased with new money
- Income through annuity mortgages – peace of mind and ability to make payments
- Use of home equity – for medical bills, new car, vacations, et cetera
- Financial security through a stable monthly payment – budget planning is easier
- Peace of mind regarding assets to be left to heirs – home equity for inheritance
Disadvantages of Senior Citizen Mortgages
There are some caveats for senior citizens to address when considering taking on new mortgage commitments. These include the following potential disadvantages:
- Control over financial situation may become limited – external economic conditions can wreck havoc on a budget
- Outliving a reverse mortgage – facing a future of poverty due to age and lack of income
- Income disruption may interfere with ability to pay mortgage – income instability or loss can result in loss of home
- Decreasing assets could affect estate value – economic conditions are unpredictable; reverse mortgages slowly eliminate any equity in home
- Susceptibility to scam artists – seniors are seen as easy prey to unscrupulous lenders
Chapter 3 – Steps for Obtaining a Senior Citizen Mortgage
Time is always important when seeking to obtain any type of mortgage, at any age. Lenders cannot discriminate against age, but they can put forth certain stipulations for mortgage qualification that must be followed. Advance planning is the only way to prepare for getting any type of mortgage, especially in senior years. No mortgage can be obtained instantly. It may be advisable to begin with research well in advance of the time when you expect to need another mortgage or refinancing loan. Watch for new financial mortgage programs from lenders and from the government that might be beneficial to your situation.
–The first step to take for obtaining a senior citizen mortgage is to research what is available. To do this, visit several lenders or lender websites, and create a chart that contains the following information for each lender considered:
- Total amount of mortgage
- Monthly payment amount
- Length of term in months/years
- Down payment required
- APR interest rates
- Fees for the mortgage – points, origination
- Time required to obtain approval
- Documentation required for approval
- Whether or not the mortgage will eventually be sold to another entity
- If mortgage is transferable or assumable
- Are there any pre-payment penalties
- Is there a local office where you can go to with questions about your mortgage
–The second step to take is to compare the opportunities. Select two or three of the best and do some in-person investigation by contacting these lenders by telephone or in their office. Ask questions to verify the information you have on hand and to find out if there are any more details you need to know about their product. Do not give them your personal or credit information yet. Ask what paperwork you will need to assemble for their product application.
–A third step is to gather together all paperwork and documentation you are required to have to obtain your senior citizen mortgage. This may include some or all of the following papers:
- Current existing mortgage or loans
- Personal identification papers – driver’s license, birth certificate
- Proof of income statements – retirement, annuity, social security document or other papers showing monthly income
- Homeowner insurance paperwork or information
- Banking information – checking or savings account numbers, financial institution contact information
–A fourth step is to obtain some competent counsel about mortgages. This could be a family member, but a good real estate lawyer can be a loyal ally in your search for the right mortgage.
–Finally, make an appointment with the top choice. Do not let anyone run a credit check or do other investigation about your finances prior to making a final choice. If you do not restrict the lenders, your credit record may take a hit that could cost you higher interest rates in the long run. Remember that this lender will be working for you; you are not doing them a favor by bringing in your business. Ask any and all the questions you have about the mortgage before giving them an okay to run your credit. Only let them proceed if you are sure that this is the financial instrument you want to obtain.
Benefits from finding a good mortgage product or from modification plans for existing mortgages can be remarkable. For example, one couple, Bob and Doris, found that medical bills from a coronary bypass surgery placed them in severe financial difficulty. They were able to ultimately reduce their mortgage payments by a whopping 35% through a loan modification program offered by Freddie Mac, the holder of their mortgage. They had been facing bankruptcy and foreclosure, but the loan modification to their mortgage allowed them to stay in their home.
Chapter 4 – Options for Senior Citizen Mortgages
There are many financial products available to senior citizens wanting to obtain a mortgage, second mortgage, HELOC, or other refinancing option. Each has its own advantages and disadvantages. Remember, it is against federal law for lenders to discriminate on the basis of age.
Types of Mortgages and Loan for Senior Citizens:
1. New mortgage – this is the traditional mortgage for 5, 10, 15, 20 or 30 years. The main qualifier would be income and credit history. These are available at best rates from banks, credit unions, and other traditional financial resources.
2. Second mortgage – this is a mortgage for a smaller amount than the primary mortgage, and it is in addition to the first mortgage. The second has descending priority; if there were a problem like a foreclosure, the first mortgage would have priority over repayment of the second. These loans are available at best rates from traditional lenders.
3. Refinance mortgage – this type of mortgage is frequently done to accomplish one of two things: a) reduce the interest rate and therefore monthly payment amounts, or b) to free up equity in the home. It may also be worked to either lengthen or reduce the total time term of the mortgage. A longer term usually means lower monthly payments. These loans are available at traditional lenders and non-traditional lenders.
4. Reverse mortgage – these are mortgages that provide income to senior citizens. You must be 62 years of age and have equity in the home. Each month the amount owed to the bank will rise instead of decrease. Many are designed to run for 30 years. At the end of the mortgage term, the home is fully owned by the bank and the homeowner has zero equity left. The home is sold to pay off the mortgage at the end of the term, or if the homeowner dies during the term of the mortgage their heirs can refinance it or sell the home to pay off the reverse mortgage. These loans are available from many sources. They provide additional income to the borrower, and can bring peace of mind from having that needed income for living expenses. A potential problem might be if the market value of the home decreases significantly over time, in which case there may be some amount still owed following sale of the home to pay off the mortgage. Another drawback to reverse mortgage funding is that they can carry very high fees, including closing costs, mortgage insurance premiums, origination fees and service fees.
Obtaining a reverse mortgage includes the following benefits:
i. You choose whether you want monthly payments, a credit line or a large lump sum. There is great flexibility in choice for amounts and frequency of reverse mortgage payments.
ii. The total mortgage amount is figured based upon the market value of your home. Therefore, you will never receive more than that market value.
iii. Repayment, including any interest and lender fees, can be done within the loan term or when you sell the house. If you are deceased, your heirs can either sell the home to pay off the reverse mortgage or they can refinance it if they wish to keep it as their own home. Their ability to get refinancing is greater because the loan will never be for more than the home’s market value. If they do sell the house to pay off the mortgage, there should still be extra money left over as their inheritance.
iv. You should, in general, be able to pay off a reverse mortgage early, in full or part, without penalty.
v. You will have peace of mind knowing that you will not leave heirs with a large debt.
vi. Terms are flexible and you should be able to alter payment options.
5. Reverse annuity mortgage – this mortgage is similar to a reverse mortgage and provides income to the senior citizen over a period of time. In Montana, the State Board of Housing has had a program since 1990 for lower income seniors who are aged 68 or older. Seniors can borrow home equity to use that form of income for repairs, bills, income or other purposes. The loan can be up to 30 years and is due at the time when the last person on the loan dies, or when the home is sold. Other conditions apply that would terminate the loan, such as an illness that makes it impossible for the borrower to continue living in the home, if the home is allow to fall into disrepair, if everyone moves, or if taxes are unpaid.
6. HELOC – Home Equity Loans are loans that use home equity as collateral for the loan. If the loan is not paid, the home is at risk of being lost in foreclosure. Loans can be taken out for various amounts, depending upon the amount of equity in a home. The money can be used for any purpose, including education, vehicle purchase, second home purchase, bills, vacations or medical expenses. They are available from many resources.
7. Home Equity Conversion Mortgages – HECM – these loans have the same repayment conditions as do reverse annuity mortgages.
a. To obtain a HECM, seniors must be 62 or older, living in a home that is a principal residence.
b. The home is required to be either single family, one of a 4-unit dwelling, a condo, or in a planned unit development or PUD.
c. The home must meet minimum HUD property standards, and be at least a year old. The loan applicant must meet with an approved counselor. If the home required repairs, the HECM may be used for that purpose.
d. This type of mortgage is regulated by the Federal Housing Administration (FHA) and is under the scrutiny of the U.S. Department of Housing and Urban Development.
e. FHA will tell your lender how much you can borrow, depending on your home value and your own age.
f. Costs and fees can be worked into the loan, but those will reduce the final cash amount available.
g. Costs are limited and you can feel assured that FHA guarantees lenders will live up to their obligations. HECM loans offer the largest advances compared to other reverse mortgages, more choices on payment to you. None of the reverse mortgages are cheap, but HECM loans have the best rate.
8. Aging In Place Loans (some areas) – One example is found in the state of Montana, in their program called “NeighborWorks Great Falls.”
a. Loans are made to seniors for repairs to their home and to allow them to remain in the home.
b. The program provides consultation at no charge to seniors in selecting reliable approved contractors to do renovation work.
c. Monthly payments of interest and principal are required.
d. For an alternative, Great Falls and other cities also offer seniors deferred tax loans.
Chapter 5 – Facts About Senior Citizen Mortgages
– What you should know
- Lenders are not allowed by law to discriminate against anyone on the basis of age
- Mortgage details may be confusing for anyone; it is important to fully understand what you are getting into. Do not hesitate to bring another person or lawyer with you to any meetings with lenders.
- There is a time period when any contract may be voided.
- Any lien against your home puts that home and its ownership at risk of loss.
- With any mortgage there may be some expensive fees, such as origination fees that could run several thousand dollars, based upon the value of the home.
- Work with your lender, and do not resort to going to a foreclosure rescue company.
- Sometimes a mortgage modification adjustment will make your current mortgage affordable.
- There are alternative programs to help seniors that should be considered, such as the NeighborWorks programs available in many cities. For example, a female senior citizen was able to purchase the home she had lived in for 25 years following the death of her landlord and subsequent placement of the home into foreclosure proceedings. She obtained a low interest loan to purchase that home from the Baltimore NeighborWorks America program. Read more at: http://www.nw.org/network/index.asp
Chapter 6 – Where to Look for Financial and Legal Assistance
– Financial and Legal Assistance
- Free legal aid – contact your local Legal Aid organization. Many lawyers offer pro bono (free) services to the public. Check online at the American Bar Association website, www.new.abanet.org/aging/, www.nolo.com, www.uslaw.com, www.freeadvice.com, www.thelaw.com, www.findlaw.com
- Find free legal aid directory at: http://www.abanet.org/legalservices/findlegalhelp/home.cfm
- Free financial advice – local classes and seminars, Internet websites
- Senior Citizen Advocates – AARP, National Senior Citizens Law Center (NSCLC)
- Government – Social Security Administration, HUD, Freddie Mac
- Local bank or credit union offices
- Internet resources – see list of website resources at end of this article
- Educational resources – many seminars and classes are tailored to answer senior citizen questions about finances and home ownership
Chapter 7 – Resources for Senior Citizens – Associations and Organizations
– Notable associations and organizations (External resources)
1. AARP – American Association of Retired Persons – http://www.aarp.com
2. ABA – American Bar Association – http://new.abanet.org/aging/Pages/default.aspx
3. NSCLC – National Senior Citizens Law Center – http://www.nsclc.org/
Tools For Senior Citizen Mortgages
– Mortgage & Refinance Calculator
– Websites of interest to senior citizens
a. http://portal.hud.gov/portal/page/portal/HUD/topics/information_for_senior_citizens General Senior Housing and Mortgage Information
b. http://www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm HECM Mortgages
c. http://www.usa.gov/Topics/Seniors/Housing.shtml Housing for Seniors
d. http://www.aoa.gov/AoARoot/AoA_Programs/HCLTC/CIAIP/index.aspx Aging in Place program information
e. http://www.aarp.org/money Money and Debt Advice from AARP
f. http://www.nw.org/network/consumers/success_stories.asp How NeighborWorks America can help seniors
g. http://www.homemods.org/index.shtml Home Loan Modification Information
h. http://www.hud.gov/offices/hsg/sfh/hecm/hecmhome.cfm Find details from HUD on HECM
i. http://www.usa.gov/Topics/Seniors/FederalState.shtml Federal and State Agencies for Seniors
j. http://www.usa.gov/Topics/Seniors.shtml Senior Citizen resources
Chapter 8 – Final Tips & Warnings
Senior citizens are allowed special discounts and assistance from a variety of resources. The best-case scenario would be for a senior to be able to have an affordable mortgage and sufficient income to allow them to remain in their home as long as they desire, while also being able to pay all monthly bills without undue stress over finances.
When a senior has a home fully paid for or almost paid for, they are in a good position to extract needed cash from that home if necessary. Popular options today are the reverse mortgages or mortgage modification programs. Home equity that has been built up by the homeowner can be partially withdrawn to meet current and future needs of the senior citizen. Pre-planning for retirement and housing needs is essential as people are living longer while economic pressures continue to escalate for everyone, including senior citizens.
A senior would be well advised to find competent assistance to determine which course of action is of best benefit for their individual needs. This may mean bringing in family to help, or a licensed attorney or other financial advisor. Since most programs have complex details, having a good advisor who understands all the fine print is very important to assure that the senior citizen will obtain the best rates, mortgage options and lowest payments. Small mistakes can result in great expense, which is another reason senior citizens should not ‘go it alone” on financial matters that are critical to life enjoyment and maintaining control over expenses and your living situation.
Mortgage modifications can result in savings experienced by some seniors, including saving 35% on mortgage payments or reducing monthly payments by hundreds of dollars. With these possibilities, remaining in their comfortable home environment is a reality for many seniors who are willing to obtain the needed financial instruments. New mortgages, refinancing, reverse mortgages, home equity loans, home equity conversion mortgages, tax deferment programs and other financial tools are available to senior citizens, regardless of their advanced age.
Finding low cost options for mortgages and refinancing are important and well worth the time it takes to do research to find the best deals. High cost loans, scams and unscrupulous lenders prey on the elderly as easy targets. Every senior is entitled to get a fair deal on the financial market, but the same warnings apply to senior citizens as do to younger persons.
- Always remember, if it sounds too good to be true, it probably is.
- Buyer beware is a slogan right for all ages and circumstances.
- Read and understand the fine print before you sign anything.
- Act in haste; repent at leisure. Never allow anyone to rush you!
Mortgage renewals, reversals or adjustments are viable options for many senior citizens who are able to remain in their homes independently. If this desirable situation is no longer possible, senior citizens should consider other options to this as a next step for living accommodations. These housing options may include home sharing, assisted living, downsizing, rentals or nursing homes. No matter what choice is made, remember that the law protects seniors from age discrimination with regard to housing.
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