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Jan. 28, 2021, 2:15 p.m. EST

I’m retired and won’t live to see my mortgage paid off. Should I refinance to lower my monthly payment?

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Jacob Passy

‘The Big Move’ is a MarketWatch column looking at the ins and outs of real estate, from navigating the search for a new home to applying for a mortgage.

Do you have a question about buying or selling a home? Do you want to know where your next move should be? Email Jacob Passy at TheBigMove@marketwatch.com.

Dear MarketWatch,

I am 68 and became disabled in December 2007; I had to retire in May 2008. In 2010, my home was refinanced with Wells Fargo and Freddie Mac. I have no idea how this works having two mortgages.

My refinanced mortgage started at 3% and has increased over the years. It is now at 4.75%, and the monthly payment is around $780, which includes escrow, except homeowner’s insurance, which increases every year.

I owe $48,000 on my home. Since I won’t live to see my home paid off, I need to lower the principal to help me stay in my home, because the cost of living is increasing every year.

Is it worth having my home refinanced at a lower, fixed percentage rate and paying closing costs? I’m trying to avoid a reverse mortgage, mainly because I don’t understand how they work.

I hope you will help me, because I have no one to help. I’m single and have no children.

Sincerely,

Refinancing while retired

Dear Refinancing,

Right off the bat, I have to commend you for being proactive in considering ways to reduce the burden of these housing costs. In speaking with mortgage experts, it became clear that you’re far from alone.

Many baby boomers are facing similar dilemmas: They haven’t paid off all their debts before retiring, or they’ve found that their fixed income cannot account for inflation as well it once might have. But you’re thinking a few steps ahead.

“More often than not the calls aren’t being made to me as the lender until the mortgage is already behind, which is going to limit the options that we could look at,” Donny Schulze, a mortgage banker with Embrace Home Loans, said.

Before I jump into some recommendations about your situation, I do quickly want to clear up one common misconception. Freddie Mac /zigman2/quotes/202741363/composite FMCC +0.42% is not actually a lender. Like Fannie Mae /zigman2/quotes/208846331/composite FNMA -0.54% , Freddie Mac is a government-sponsored enterprise that was created to provide liquidity to the housing market. What does that mean? Fannie and Freddie purchase pools of mortgages from banks, like Wells Fargo, and securitize them.

By buying these mortgages, Fannie and Freddie not only pump more money into the housing-finance ecosystem — which lenders can use to create more mortgages — but they also take on the risk associated with those loans. Without Fannie and Freddie, 30-year mortgages would be more a rarity than the default in this country.

So it sounds like, in your case, that you actually have a single mortgage from Wells Fargo /zigman2/quotes/203790192/composite WFC +0.87% that was backed by Freddie Mac.

As to your question, refinancing your mortgage could help to reduce your monthly housing costs, but there may be limits. “Refinancing the balance of a $48,000 mortgage with an interest rate that’s in the low-4% range and bringing it down to today’s rates might not have as big of an impact as a homeowner might anticipate,” Schulze warned.

But a refinance could help right-side your finance in other ways that make your life more comfortable. You don’t mention what other debts you have, but let’s say that you also have credit cards or auto loans you’re looking to pay off. Those loans typically carry higher interest rates than mortgages do.

Don’t miss: We want to use our inheritance to buy our dream home in this popular vacation destination — is $800,000 overpriced?

So one option you have is to do a cash-out refinance, where you take a portion of the equity you’ve accrued and use it to pay off those other loans. While you may have a larger principal to pay back, eliminating those loans could reduce your overall monthly outlays.

A cash-out refinance could also help you ensure that your home meets your needs as you get older. “Imagine what you would want when you’re 85, not when you’re 68,” said Brian Koss, executive vice president at Mortgage Network, a Massachusetts-based lender. Taking some money out now to make repairs or improvements that will make your home more livable could pay dividends down the road.

As you indicated, refinancing doesn’t come for free. You’ve indicated that you don’t expect to pay off your mortgage before you die, and that you don’t have heirs who might want to inherit the property. So the cost-benefit analysis may look somewhat different for you.

When most people refinance, their main priority is the aggregate savings — and it can take many years to realize those. For some people, a lower interest rate might not save them money overall even if their monthly payment is smaller because they could pay more in interest, if they’re extending the term of their loan significantly by refinancing.

In your case, you’re looking simply for a lower monthly payment. Let’s say refinancing will save you $100 a month on the mortgage payment, but will cost you $2,000 in closing costs. Those closing costs often can be rolled into the principal, so you won’t necessarily need to pay them up-front. Doing the math, after 20 months, you’ll have broken even when looking at it from this perspective. Ultimately, you’ll need to do the math after getting offers to see if it makes sense.

My advice: Go to multiple lenders, and be up-front with what you’re looking for. And don’t worry about your age or fixed income being an issue. “We’ve given 30-year mortgages in the last year to people in their 90s,” Koss said. “It’s against the law for us to discriminate.”

Once you’ve done the math, determine whether it does make sense to refinance. Should you choose not to go through with one, you’re not necessarily out of luck. You can also go to your existing mortgage lender to explain that you’re having trouble.

“Her problems are also her current lender’s problems,” said Holden Lewis, mortgage expert at NerdWallet. “Her lender doesn’t want her to fall behind on the payments, so it has an incentive to reduce the monthly payments and make them easier for her to afford. The lender might offer a refinance for a lower interest rate, with little or no closing costs paid out of pocket.”

One last thing: I know you said you don’t want to consider a reverse mortgage because you don’t understand them — and that instinct is definitely a good one. But I do think that you should be aware that yours is a scenario where a reverse mortgage could make a lot of sense.

“Recent reforms have made these products much less risky than in the past,” said Tendayi Kapfidze, chief economist at LendingTree /zigman2/quotes/204207971/composite TREE +2.66% . “Since this borrower is struggling with cash flow, a mortgage that pays you rather than one you pay could be the way to go.”

Here’s a longer rundown of how reverse mortgages work (and some recent changes to the loan product), but in essence with a reverse mortgage you don’t pay the lender. Instead, they pay you. (Though the loans do come with certain costs, namely the cost of mortgage insurance.)

You can use a reverse mortgage like a line of credit to pay for living expenses in your old age. And then when you die, or when you move out of the home, you must pay the loan back. In most cases, this is done by selling the home.

Read more: Now could be the time for a reverse mortgage—or it could be an expensive mistake

Reverse mortgages have been the subject of scandals in the past. People today are wary of them for a couple of reasons: First, people often will go through most of the equity in their home using one, leaving their children with little in the way of an inheritance. Plus, people who are not careful about ensuring they have money set aside to cover utilities, taxes and insurance can face foreclosure for failing to make those payments.

Because you don’t have children or other relatives to rely on, it sounds as if you may not encounter the concerns many do in worrying about the inheritance they will leave behind. So for you, a reverse mortgage could be a lifeline to stop worrying about monthly mortgage payments — though you would need to make sure to pay your utilities, taxes and insurance.

If you need more direct assistance as you go through this process, consider contacting a housing counselor. The Department of Housing and Urban Development has a directory and hotline that can help you find a counselor in your area suited to your needs. Best of luck!

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