Can I refinance?

[Anonymous]

Here is our situation:

We own a house that is worth between approximately $1.6 million and have a first mortgage of $646K at 3.75% (5/1 through Penfed), a HEL of $125K (5.9% fixed) and a HELOC of $250K (varies with prime). The HEL was taken to buy a condo for use during winter and the HELOC was primarily to fund college expenditure for the kids as well as some home improvements.

All of this debt was taken several years ago when our income was substantially higher than it is today. We have since then retired. Our current income between SS and annuity/pension is about $105K annually. Our mortgage and property tax payments are about $6500 monthly. We have no other debts ....... credit card, auto etc.

We have about $1.2 million in savings of which two-thirds are in taxable retirement funds. We draw about $3500 from savings each month to meet our obligations and maintain our lifestyle. We also have excellent healthcare coverage and are both in our late sixties.

We both have excellent credit with FICO scores in the high 700s'. I would like to take advantage of the current low interest rates and lock in a rate based on financing the entire debt owing on the house at this time - the debt relating to the house is currently just over $1 million. However, at the present time based on our income we would not qualify for a mortgage of this amount.

Can anyone suggest a creative solution to finance the debt that we have and take advantage of the current low rates - or are we pretty much locked into the current rates? We have considered scaling down though quite honesty if we do so it would be because we could be comfortable with less house. Financially, between our current retirement income and the limited draw-down of capital, we can likely continue in our present house provided rates don't spike up resulting in a steep increase in our payments.

[Anonymous]

I am not clear why you want to go into retirement with 1 million in mortgage and only 1.2 million in savings.

Personally, I would sell the house and buy something you own free and clear, or at least have a much more manageable mortgage on.

[Anonymous]

Anonymous wrote:I am not clear why you want to go into retirement with 1 million in mortgage and only 1.2 million in savings.

Personally, I would sell the house and buy something you own free and clear, or at least have a much more manageable mortgage on.

As I mentioned, we are able to manage quite comfortably drawing just $3500 monthly out our savings ...... which is quite a bit less than the interest/dividends on those savings. So we are not financially stretched despite the large mortgage. The annual income of $105K is not likely to go down and will increase to reflect inflation.

Having said this it is possible that we would look to downsize sometime in the next five years.

[Anonymous]

If your pattern of withdrawals is consistent and enough to qualify for the mortgage, you should be able to find a bank willing to lend to you.

If not, you might consider paying down the highest interest line of credit-- it's unlikely your portfolio is making that much money and you probably don't need the liquidity.

[Anonymous]

You can probably refinance but I really think you are on shaky ground for retirement long term. You've got very limited savings and income. I would seriously downsize and pay off most of the loans with your home equity. Even a $1 million house would give you a lot more finanical security.

The maintenance on 2 houses alone must eat up a lot of your income?

[Anonymous]

Anonymous wrote:You can probably refinance but I really think you are on shaky ground for retirement long term. You've got very limited savings and income. I would seriously downsize and pay off most of the loans with your home equity. Even a $1 million house would give you a lot more finanical security.

The maintenance on 2 houses alone must eat up a lot of your income?

We are open to downsizing and will most likely do so in the next five years. What I would like clarification is why you think we are on shaky ground for retirement with our current savings. We dip into savings less than the earnings. If one looks at our savings over the last five years since retirement, our savings in absolute terms has increased without considering inflation ..... and even allowing for inflation, the impact has been modest.

The second home is fully paid and our only expense is the condo fees.

Quite honestly, if we downsized, our lifestyle would not change ........ we'd probably just give more money to our kids and grandkids.

Having said this, I do accept that the level of indebtedness on our house is not typical of retirees.

[Anonymous]

If your pattern of withdrawals is consistent and enough to qualify for the mortgage, you should be able to find a bank willing to lend to you.

Mortgage lenders are not looking favorably on retirement income right now. I'm an agent and this has caused problems with buyers getting loans lately.

[Anonymous]

Anonymous wrote:

Anonymous wrote:You can probably refinance but I really think you are on shaky ground for retirement long term. You've got very limited savings and income. I would seriously downsize and pay off most of the loans with your home equity. Even a $1 million house would give you a lot more finanical security.

The maintenance on 2 houses alone must eat up a lot of your income?

We are open to downsizing and will most likely do so in the next five years. What I would like clarification is why you think we are on shaky ground for retirement with our current savings. We dip into savings less than the earnings. If one looks at our savings over the last five years since retirement, our savings in absolute terms has increased without considering inflation ..... and even allowing for inflation, the impact has been modest.

The second home is fully paid and our only expense is the condo fees.

Quite honestly, if we downsized, our lifestyle would not change ........ we'd probably just give more money to our kids and grandkids.

Having said this, I do accept that the level of indebtedness on our house is not typical of retirees.

Because you've got to plan for 20-30 years of living on your income (my grandmother died at 99, others in my family and my DHs family seemed to make it to their 90s), you've got relatively little equity in your home and a modest savings acount (I recognize that $1.2 million may not seem modest to some, but for someone with 2 houses, one of which is worth $1.6 million, you are presumably living at the somewhat higher end of the scale).

Your mortgages take $78,000 of your income, untilities and maintenance of two homes must cost another $20-25k (I have 2 houses and that's conservative for ours), so that leaves you with very little for anything else. As I understand it you are also drawing down your principal at $42,000 a year.

What happens when one of you needs to go into a nursing home, or needs other long term care? That cost an arm and a leg for my in-laws and grandparents and ate away at principal mighty fast.

I assume you have a good financial advisor so I'd sit down with him/her and go over the refi options and what makes the most sense. As a comparison, I am 50, we have at least $2.5 million saved for retirement, and refied both mortgages to 15 years so that we have them fully paid off a few years before age 65. Our total mortgages are $600k against home value of about $2 million (so value probably not too different from yours). And I am nervous about having enough for retirement and am ramping up our savings substantially.

[Anonymous]

Your investment income is uncertain. Your mortgage payments are high and fixed, not to mention property taxes etc. You have very significant healthcare costs in the future.
I also don't think it makes sense to have investments when you have a HELOC at 5.9 percent.

[Anonymous]

1.2 million is not a lot to make last for another 30 years for 2 people. Especially if one or both people will need expensive long term care. I really, really urge you to consider downsizing now.

[Anonymous]

I haven't run the numbers carefully but offhand I don't see why people are giving the OP such a hard time. They have 105k in income and 78k in housing costs leaving about 2k a month for other expenses before touching savings (no way do we spend 10k per year on house maintenance). Plus I don't see how downsizing is going to increase their net worth.

[Anonymous]

If you are selling before the arm resets why would you finance. Also your housing costs are over 75%, you are screwed downsize now

[Anonymous]

They are withdrawing from savings at a rate of about 3.5%. That is in the range of a reasonable withdrawal rate.

There's something to be said for not having a mortgage in retirement, but I think it's difficult to say that you are always better off without one.

[Anonymous]

OP here: thanks for all the responses even though I was really seeking advice on whether given our finances it would be possible to refinance.

However, let me respond to some of the points made as to our financial viability given the circumstances outlined.

The rate of return we have earned on our investments during the past five years has averaged about 6% ...... and this is without taking any undue risks.

Assuming that we stay in our residence for the next ten years - not our intention, I hasten to add - the amounts owed on the first mortgage would $400K, the HEL would be $48K and let us assume the HELOC still has a balance of $250K. So the total indebtedness would be approximately $700K. At that point, even assuming the value of the primary residence remains at $1.6 million, the equity we would have in the house would be $900K.

If I purchase an annuity for $1 million (out of the $1.2 million we have in savings) today through - say Fidelity - with full annuity payments to the surviving spouse, we would receive approximately $4900 per month as long as we live. A lot more than the $3500 monthly that we are currently drawing out of savings to meet our expenditures.

We could of course sell our winter condo and realize funds, if we need to do so.

Our utilities, yard work, house cleaning and general mtce runs about $1000 per month.

We currently pay very little in the way of federal and state income tax because of the mortgage and RE tax deductions.

We each have life insurance of $500K ....... so if either of us should die, the surviving spouse could pay off a substantial portion of the debt on the house.

We live very well but through a combination of being careful with money and life-style choices, our monthly outlays on expenses not specified above is quite modest. The only major expense we incur is taking two or three vacations a year, usually a cruise annually and a visit overseas. In the process we have traveled quite a bit ...... something we both enjoy doing.

I am not a financial advisor but my background is in finance. I have never been fearful of debt per se as long as we have the capacity to service the debt. We don't lose any sleep because we have a substantial mortgage since we can make the payments effortlessly.

The one point that has been made that is entirely valid - and it is something that we have thought about - is what would happen if one or both of us became incapacitated and required long term care. I am not sure I know the answer to this but given the cost of care, I am not sure that any amount of money, within reason, would offer one the assurance needed to deal with that contingency. I have looked at long term care coverage but have not found a product that I am comfortable buying.

Just some thoughts ...... I hope I don't come across as defensive ...... because that is certainly not my intention. I just wanted those who offered cautionary advice to be aware that there is an element of reasoning in what we are doing.

[Anonymous]

I would downsize the house, but for mostly non-financial reasons. It's just easier to downsize in your sixties than it is to do it later in life. My mom is in her mid-seventies and just moved into senior housing. She's in great shape - very active, healthy as a horse, travels all the time - and even then, the transition was really hard on her. Sooner or later we're also going to have to move her to a place closer to us and at that point it will be too late for her to establish roots in her new community. That's when she'll need those kinds of connections the most too. So, in your shoes my thinking would be focused on the question of aging and whether or not you can age where you are now. Assuming you don't want the care and upkeep of a large, expensive home as you age, I would be looking for a home that could accommodate a much older, much less healthy you in a location where you would have easy access to services and family.