By Ellen James Martin
All across the nation, baby boomers age 60 and above are grappling with a thorny choice: should they renovate the family home or sell and downsize?
Downsizing sounds like the obvious choice because it frees the homeowners from the ordeal of renovating to make their property suitable for aging in place.
But aging in place also its advantages, says Jorie Johnson, a certified financial planner who heads her own company. For instance, it could allow owners to remain in a community where they have established relationships.
Johnson, a fee-only planner affiliated with the National Association of Personal Financial Advisors (napfa.org), tells the true story of a couple of retired clients who sold their family home and moved to a retirement community a 40-minute drive from their old neighborhood, where their grown children live.
“They thought the drive wouldn’t be a problem. But it proved a major impediment to seeing the children and grandkids,” Johnson recalls.
Johnson says a cash-out refinance could be the best choice for someone who’s willing to renovate to remain in the same neighborhood.
“The big upside for a lot of people is the ability to stay in your same community,” she says.
Here are a few pointers for homeowners seeking to renovate through a cashout refinance:
— Recognize that good credit still rules for lenders.
Though mortgage money for most borrowers is still available at very favorable rates, most lenders continue to adhere to stringent standards.
“Expect to jump through more credit hoops than you did when you first bought your house years ago,” says Keith Gumbinger, a vice president at HSH Associates (hsh.com), which tracks mortgage rates throughout the country.
Borrowers are still asked to explain blemishes on their credit reports, correcting flaws and inaccuracies when possible. Even seemingly minor dings, like an unpaid $179.01 balance on your cell phone bill, could hinder the processing of your loan.
Prudent borrowers closely examine their credit reports before applying for a home loan, Gumbinger says. Under federal law, each year you’re entitled to one free credit report from each of the three largest credit bureaus: Equifax, Experían, and TransUnion. Just go to this website: annualcreditreport.com.
In addition, you’ll 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.
“Now as much as ever, people with low FICO scores are punished and may have trouble getting a mortgage at any interest rate. But people in the 700s and above are rewarded with the best rates available in the market,” Gumbinger says.
Those who inform themselves on their credit history are better prepared to slide rather than stumble through the process of applying for a mortgage, he says.
— Do lots of comparison shopping on rates and service.
One irony of the current mortgage market is that lenders are as eager as ever to make loans, even though their guidelines remain tight by historical standards.
“Because the volume of mortgage refinance is relatively low now, lenders are eager to do business,” says Mike Hummel, a mortgage broker in the business since 1997.
He urges those seeking to refinance to shop around, steering clear of lenders who might overcharge them. To do so, he recommends that all borrowers carefully scrutinize a lender’s estimate of fees and charges before committing to do business with that firm.
In this credit-conscious period, Hummel says those with high FICO scores — ideally over 740 — may be able to use their good scores as a bargaining chip for a slightly better rate, or reduced loan fees.
— Try to reduce your debt 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 big 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, car payments or student loans, you may not be able to borrow as much as you want when you refinance.
As Gumbinger observes, 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.
“Big debts are always a big problem when it comes time to borrow money,” he says.
(To contact Ellen James Martin, email her at email@example.com.)