Many American homeowners now have enviable amounts of equity -- built up through the rapid home value appreciation that’s occurred since the pandemic began. What’s more, some own their homes free and clear, having paid off their mortgage years ago.
But as they move into their elder years, an increasing number of seniors now wish to tap that growing home equity to finance home improvements, allowing them to age in place.
“As they advance in years, most folks desperately wish to stay in their longtime residence. Yet to do that, they often need funds to modify their property -- perhaps by adding an elevator or a first-floor master bedroom,” says Merrill Ottwein, a real estate broker with Coldwell Banker.
To finance these modifications, some seniors who own their homes free and clear are seeking to apply for a new “cash-out” mortgage. But that can be a tricky path.
Take the case of a 66-year-old engineer who owns a two-story colonial with an attached garage he wishes to convert to an accessible bedroom. The problem is that because the man now has had no debt or credit cards, he must reestablish his credit before borrowing.
Eric Tyson, author of “Personal Finance for Dummies,” doesn’t know the engineer. But he says the man can likely reclaim his credit standing within a matter of months simply by taking out a new credit card, using it responsibly and making his payments on time.
“Another option is to become an authorized user on a credit card account of a spouse or other relative with a good payment history,” Tyson says.
Here are a few other pointers for those seeking to strengthen their credit:
-- Move forward promptly with your financing plans.
Mortgage rates have been ascending in recent weeks and economists forecast this trend will continue, barring another recession. That’s why home loan specialists say there’s no point in postponing refinance plans in hopes of a dip in rates.
“If you need to remodel your house, you’re better off pulling the trigger now, before rates rise even more,” says Keith Gumbinger, a vice president at HSH Associates (HSH.com), which tracks mortgage markets throughout the United States.
Many seniors assume that once they’re retired, they’ll automatically lack access to the mortgage market. But Mike Hummel, a longtime mortgage broker, says that’s a misconception.
“As lenders, we want to originate loans. If you have the retirement income or assets to pay back the new mortgage, you should be able to qualify regardless of your age or employment status,” he says.
Hummel encourages seniors who are interested in remodeling with a cash-out mortgage to contact a reputable lender in their community to discuss their current options, based on their equity picture.
-- Realize the vital importance of good credit for all borrowers.
Ever since the real estate downturn of 2008, which resulted in numerous foreclosures, lenders have maintained tight standards with little latitude to bend the rules.
“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, especially a cash-out one,” 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 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 will 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.
-- Seek to lower your credit card repayment burden.
Do you already have 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.
Along with your FICO score, another key qualifier is your debt-to-income ratio. If you face high minimum payments each month v-- 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 ones. Alternatively, consider moving high credit card debt to an installment loan made through a credit union or a community bank.
-- Choose a fixed-rate mortgage over a variable rate one.
One lesson many consumers learned the hard way through the mortgage crisis is the potential danger of adjustable-rate mortgages.
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 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.)