What to know about the rate-and-term refinance option for seniors

A rate-and-term refinance is an option for seniors. Learn how it works, the pros and cons, and more. (Shutterstock)

Refinancing your mortgage as a senior homeowner can be challenging. If you’re retired, you may find it more difficult to meet a lender’s income requirements, but it’s possible to qualify. A rate-and-term refinance can be a good option — it could help you lower your interest rate, reduce your monthly mortgage payments, or shorten your loan term.

Here’s what you need to know about the rate-and-term refinance option for seniors, including the pros and cons, and how to do it.

Credible makes it easy to see your prequalified mortgage refinance rates in minutes.

• What’s a rate-and-term refinance?
• How does the rate-and-term refinance option work?
• What challenges do seniors face when refinancing?
• Are you eligible for the rate-and-term refinance option as a senior?
• Pros and cons of the rate-and-term refinance option for seniors
• Is a rate-and-term refinance right for you?
• How to get a rate-and-term refinance as a senior
• What to consider before getting a rate-and-term refinance as a senior
• Other refinance options for seniors

What’s a rate-and-term refinance?

A rate-and-term refinance, also referred to as a no-cash-out refinance, allows you to replace your existing mortgage with a new one. The new mortgage pays off the original loan and often comes with more favorable terms, such as a lower interest rate, reduced monthly payments, or both. 

Even though you’re changing the loan terms, you don’t have to change the principal balance of your loan. And with a lower interest rate or shorter loan term, you may be able to save thousands of dollars.

How does the rate-and-term refinance option work?

You can apply for a rate-and-term refinance with your existing lender or a new one. If you’re approved, a lender will issue you a new home loan, which replaces your old one. 

For example, say you have 15 years left on a fixed-rate mortgage and your outstanding balance is $150,000 at 5%. Your current monthly mortgage payment is $1,186. By refinancing to a new 15-year mortgage at 3%, your monthly payments would drop to $1,036. You’d also save more than $27,000 in interest over the life of the loan.

What challenges do seniors face when refinancing?

While there’s no age limit for a mortgage or refinancing, senior citizens may face challenges when it comes to qualifying. 

For one thing, it can be hard to demonstrate regular income. Proving your income when you have a job can be easy — you simply provide W-2s and pay stubs. But it can be much harder if you’re a retiree. If you have a retirement account, a pension, or government annuity income, you’ll have to prove to a lender that you can access those funds without penalty.

It can also be challenging to prove that your income will last. A lender may require proof that any income paid to you via a 401(k), IRA, or Keogh retirement account will last at least three years from the date you submit your refinance application. 

Are you eligible for the rate-and-term refinance option as a senior?

It’s possible to qualify for a rate-and-term refinance as a senior — there’s no age limit. The Equal Credit Opportunity Act prohibits lenders from discriminating based on age. When you submit a refinance application, a lender will consider these factors:

• Equity in your home — Lenders often require you to have at least 20% equity in your home to qualify for a refinance. You may qualify with less equity, but a lender will likely charge you a higher interest rate.
• Credit score — Your credit score helps a lender assess how risky it is to lend you money. The better your credit score is, the greater your chances of qualifying for a lower rate.
• Debt-to-income ratio — Your DTI ratio measures what percentage of your gross monthly income goes toward repaying monthly debt. To calculate your DTI, divide your total monthly debt payments by your gross monthly income. For example, if your gross monthly income is $5,000 and your monthly debt is $2,500, your DTI is 50%. Though requirements vary by lender, you typically need a DTI of 43% or lower to refinance.
• Appraisal — A lender will require an appraisal to determine your home’s market value. The result can affect whether you qualify.

With Credible, you can easily compare mortgage refinance rates from multiple lenders.

Pros and cons of the rate-and-term refinance option for seniors

Before you apply for a rate-and-term refinance, you should weigh the pros against the cons.

Pros

• Lower your interest rate — You may qualify for a lower interest rate if your credit score or income have improved since you applied for your original mortgage.
• Reduce your monthly payment — If you’re having trouble keeping up with your mortgage payments, you can lower them by refinancing to a longer loan term.
• Switch to a fixed rate — If you want more predictable monthly payments, you can refinance from an adjustable-rate mortgage to a fixed-rate mortgage.

Cons

• Fees — You’ll have to pay closing costs, which typically range from 2% to 5% of the loan amount.
• More interest in the long run — Although refinancing to a longer-term loan can lower your monthly payment, it’ll increase the amount of interest you pay over the life of the loan.
• Higher monthly payment — While choosing a shorter loan term can help you save on interest, it can leave you with less cash to put toward other financial goals, like a dream vacation or building an emergency fund.

Is a rate-and-term refinance right for you?

Whether refinancing is right for you depends on your unique financial circumstances and goals.

For example, if rates have fallen and you’re in a better place financially since taking out your original loan, applying for a rate-and-term refinance could be a good financial move.

But if your credit score and income have dropped, you likely won’t qualify for a lower rate without a cosigner. If you want to tap the equity in your home, you may want to consider another option, such as cash-out refinancing.

How to get a rate-and-term refinance as a senior

If you believe applying for a rate-and-term refinance is the right move for you, follow these steps:

1. Check your credit. Before you apply for a rate-and-term refinance, check your credit reports to see where you stand and look for inaccuracies that can harm your credit score. You can view your credit reports from the three main credit bureaus — Equifax, Experian, and TransUnion — for free by visiting AnnualCreditReport.com.
2. Gather financial statements. Collect statements from your bank accounts, retirement, pension, Social Security income, W-2s, pay stubs (if you’re still working), and any other documents that can be used to verify your income and assets.
3. Shop around. Compare rates and terms by prequalifying with as many lenders as possible. While lenders will check your credit, it’ll only be a soft inquiry, so it won’t affect your credit score.
4. Apply for refinancing. Once you’ve selected a lender, submit a refinance application. 
5. Review and sign your closing documents. If you’re approved, a lender will send you closing documents that outline the terms of the loan, such as interest rate, term length, and repayment schedule. Read the documents carefully to ensure you agree with and understand the terms before you sign.
6. Close on your loan. Attend the closing meeting and pay any closing costs that aren’t rolled into the new loan.

What to consider before getting a rate-and-term refinance as a senior

Before you get a rate-and-term refinance, think about the following:

• How long you plan to stay in your home — If you plan on moving soon, you may not save enough money to recover your closing costs.
• Your financial health — Thinking about refinancing to a shorter loan term? Review your budget first to see if you can afford higher monthly payments.
• Downsizing — If you’re struggling to make your monthly mortgage payments, selling your home and moving to a cheaper one could be a better option than refinancing.

If you’re ready to refinance, visit Credible to compare mortgage refinance rates without affecting your credit score.

Other refinance options for seniors

The rate-and-term option isn’t the only way to refinance your mortgage. If you want to tap your home’s equity to pay for expenses or consolidate debt, you may want to consider one of these loan types:

• Cash-out refinance — A cash-out refinance and a rate-and-term refinance are similar in that you swap out your existing mortgage for a new one. But there’s a major difference: With a cash-out refinance, you replace your existing loan with a new, larger loan. You then pay off your original loan and receive the difference between the two loans in cash at closing.
• Home equity loan — A home equity loan is a second mortgage that’s secured by your home. If you’re approved for one, a lender will issue you a lump sum of money to borrow. With this type of loan, you can typically borrow between 75% and 85% of your home’s equity. You repay the loan in fixed monthly installment payments over a certain period of time.
• Home equity line of credit (HELOC) — Unlike a home equity loan, a HELOC operates like a credit card. Once approved, a lender issues you a line of credit you can borrow from as needed during a draw period, which often lasts 10 years. You can generally borrow up to 80% of your equity in the home, and sometimes more, depending on the lender. As with home equity loans, a HELOC uses your home as collateral, so it can be a risky move.