Why have a mortgage during retirement?

You don't have to watch TV for long before Tom Selleck, Henry Winkler or Robert Wagner will tell you why seniors should consider a reverse mortgage.  However, there are a seniors who are resisting the conventional wisdom of having their home paid for and opting for a mortgage with payments on their home.

In some cases, seniors will downsize into a smaller home and have a large amount of equity to pay cash for the new home.  In other situations, they may have their home paid for and decide to do a cash-out refinance which will require making payments.

The logic behind either of these examples could be motivated by the fact that since mortgage rates are so low currently, the owners can reinvest the money at a higher yield and make money on their equity.  This will give them more money for their retirement income.

A common question that is asked by owners considering such a strategy is whether they'll be able to qualify for the new mortgage since they may no longer be employed.  The Equal Credit Opportunity Act prohibits discrimination against borrowers based on age.

All borrowers, whether they are working or not, need to show that they have good credit, reasonable debt and enough stable income to repay the mortgage.  Lenders cannot base their decision on loan term based on an applicant's life expectancy, so a 30-year loan is possible regardless of the borrower's age.

Fannie Mae, one of the largest purchaser of mortgages on the secondary market, is concerned on income that is stable, predictable and likely to continue.  Retirees' income can come from Social Security, pensions, or distributions from retirement accounts like IRAs, 401(k)s, Keogh or other plans.  Lenders will analyze these sources to estimate how long it will last. 

Other investments can be considered like stocks, bonds, mutual funds and annuities.  Based on the type and the volatility of the investment, lenders may be restricted from considering 100% of the income.

Getting the facts as it pertains to you as an individual is important to be able to know if you are eligible and how much you can borrow.  A trusted mortgage professional who understands this type of borrower is very important to help you determine the right mortgage vehicle and provide information to decide if this option is right for you.  Call me at (973) 251-0100if you would like a recommendation.