SMART MOVES - Thinking about refinancing?

SMART MOVES - Thinking about refinancing?

The sooner the better, as interest rates are on the rise

Are you approaching retirement and plan to tap home equity to remodel your property so you can age in place – perhaps by adding a first-floor bedroom suite that spares you the need to climb stairs? If so, you could be in for an unhappy surprise.

"Mortgage rates are definitely rising, but many people aren't paying attention yet. Over the last 10 years, they've been spoiled into thinking rates will always stay low," says Mike Hummel, the managing director of an independent mortgage firm that's been in business since 1997.

The upshot on higher rates is that you'll pay more to do a "cash-out" refinance. But it could still make sense to go forward with your refi plan, assuming you do so promptly, says Keith Gumbinger, vice president of HSH Associates, which tracks mortgage markets across the country.

"Why procrastinate? If you need to remodel your house, you're better off pulling the trigger now before rates rise even more," Gumbinger says.

The Joint Center of Housing Studies at Harvard University estimates there are 25 million households in the country whose owners are 65 or older. Of those, it reports that 44 percent need physical changes to their property to accommodate one or more residents.

"Not even a third of homes have what could be considered basic accessibility features: a no-step entry and bedroom and full bathroom on the entry level," according to a report that the Harvard center issued on the topic.

Hummel encourages seniors who are interested in remodeling with a cash-out refinance to contact a reputable lender in their community to discuss their current options.

"Find out what's possible and go from there," he says.

Here are a few other pointers for senior homeowners considering refinance:

• Acknowledge that – as always – good credit rules for lenders.

Ever since the real estate downturn of 2008, lenders have maintained tight standards with little latitude to "As has been the case for all these post-recession years, you still have to jump through a lot of hoops to get a mortgage of any kind, including a cash-out refi," Gumbinger says.

Now as much as before, prospective borrowers are asked to explain blemishes on their credit reports, correcting flaws and inaccuracies when possible. Even seemingly minor dings, like an unpaid balance on a cellphone bill, could complicate the processing of your loan.

Prudent borrowers closely examine their credit reports before applying for a home loan. Under federal law, each year you're entitled to one free credit report from the three largest credit bureaus: Equifax, Experian and TransUnion. Just go to this website: annualcreditreport.com.

You'll also want to access your credit scores. Such scores, which draw on data from the credit bureaus, provide lenders with a quantitative measure of a person's credit risk. Most lenders still use FICO scores, pioneered by the Fair Isaac Corp.

Usually, you need to pay a fee to obtain your credit scores. One approach is to buy these through the Fair Isaac website: myfico.com. You can also receive credit scores through the three large credit bureaus. FICO scores range from 300 to 850.

• Try to reduce your credit card repayment burden before refinancing.

Does your household have multiple credit cards and more debt than you'd like? If so, remember that big minimum monthly payments on your plastic can limit your capacity to take out as large a mortgage as you'd like when you refinance.

Along with your FICO score, another key qualifier is your "debt-to-income ratio." If you face high minimum payments each month – whether on credit cards or car payments – you might be unable to borrow as much as you need when you refinance.

As Gumbinger says, one way to lower your monthly debt payouts is to move balances from your highest-interest-rate credit cards to your lowest-rate one. Alternatively, consider moving high credit card debt to an installment loan made through a credit union or a community bank.

"Too high a monthly payout is a problem for many mortgage borrowers," Gumbinger says.

• Favor a fixed-rate mortgage over an adjustable-rate one.

One lesson many consumers learned the hard way through the 2008 mortgage crisis is just how perilous adjustable-rate mortgages can be.

Though they often start off with a low "teaser rate," ARMs can later adjust upward – sometimes to a shockingly high level. That could prove especially problematic for retired seniors who often live on fixed incomes.

"The reality is that if you accept an adjustable-rate mortgage, you're agreeing to bear the risk of still steeper mortgage rates going forward," Gumbinger says.

To contact Ellen James Martin, email her at ellenjamesmartin@gmail.com.