Most people have emotional ties to their homes because of family memories created there, but the responsibilities that come with home mortgages can become financially burdensome to seniors. There are many factors you should consider when thinking about applying for a mortgage to buy, refinance or make improvements to your home.
Q: What should I keep in mind when considering a mortgage loan?
A: If you already own a home, consider whether it makes sense to stay in your current home or to downsize. As children move out, a large home may no longer be practical. Downsizing can both cash out equity from a larger home and reduce monthly expenses by replacing a larger mortgage payment on a larger home with a smaller mortgage payment on a smaller home. Moving to an apartment or condominium without a yard or where much of the maintenance is handled by a homeowner’s association is also an option.
If your home is already the right size and you can afford to stay, you may want to consider refinancing your existing mortgage loan. With proper financial planning, younger seniors can plan to repay their mortgages before they retire. However, many seniors are not able to retire without mortgage debt, and refinancing allows you to lower the interest rate or reset the term of your existing mortgage. By resetting the mortgage term, the outstanding balance of your existing loan will be spread out over a longer period of time. Extending the term may increase the overall interest charges you will pay, but it also will lower your monthly payments and free up money for other monthly expenses. If you are on a fixed income, consider refinancing from an unpredictable adjustable rate mortgage to a stable fixed rate mortgage.
Q: Will I qualify for a mortgage loan?
A: Your eligibility for a mortgage loan generally will depend on your income, your assets (checking, savings, stocks, bonds, IRAs, etc.), your credit score and the value of the property that will be securing the mortgage loan.
Not everyone who applies for a loan will be approved or will get the same loan terms, but lenders must consider reliable income from part-time employment, Social Security, pensions and annuities when making mortgage loan decisions. They must also consider reliable public assistance income in the same way that they consider other income. The Equal Credit Opportunity Act (ECOA) prohibits lenders from credit discrimination on the basis of a number of factors, including your age and whether you get public assistance. A lender may ask you for most of this information in certain situations, but may not use it as the basis of a decision to reject your mortgage application or to set your loan terms. If your mortgage application is denied, the lender must give you specific reasons for the denial.
Q: Even if I qualify, how will I know if a mortgage loan is right for me?
A: There are many types of mortgage loans, including conventional home loans, FHA insured loans, VA guaranteed loans for veterans, Rural Housing Service (RHS) guaranteed loans, home equity lines of credit and reverse mortgages. Some loans have strict qualification requirements while others are designed for lower income homebuyers.
Obtaining a mortgage loan carries costs that can vary with the type of loan you choose. Usually there will be lender fees, an appraisal fee, title insurance costs and other closing expenses related to the mortgage loan. You must also factor real estate taxes and homeowners insurance into your budget. Usually you will be required to make a down payment of between 3.5 percent and 20 percent, depending on the type of loan and the bank’s requirements. While lower down payments can be appealing in the short term, they come with higher monthly payments due to higher interest rates. Smaller down payments also may require additional mortgage insurance, increasing your total costs over the long term. However, making a higher down payment can deplete your savings and investments. It is critical to consult a trusted financial advisor and get independent financial advice before deciding which mortgage product may make sense for you, and what terms best suit your financial situation.
This “Law You Can Use” legal information column was provided by the Ohio State Bar Association. It was prepared by Adam Saurwein, an attorney in the Cleveland office of the firm of Benesch Friedlander Coplan & Aronoff.