4 Ways to Refinance Your Debt and Save Money
If you have a high-rate mortgage, student loan, car loan or credit card
Interest rates remain near historic lows. While this is bad news for savers (average rate on a one-year CD: 1.1 percent), it’s excellent news for borrowers. That's especially true if you have high-interest debt, since you can refinance and lock in those low rates.
Almost all types of debt can now be refinanced — not just mortgages, but also car loans, student loans and credit cards. If you are retired, however, qualifying to refinance can be more challenging, though not impossible.
Here is what you need to know if you want to refinance and save:
1. Refinance a Mortgage
Mortgage rates remain at near historic lows, so this could be an excellent time to refinance your home loan. As we have said on MagnifyMoney, if you want to lower your monthly mortgage payment or pay off your loan faster, it generally makes sense to refinance if you can reduce your rate by at least half a percent.
Refinancing your mortgage can be particularly wise if you are one of the roughly 4.4 million retired homeowners who still have a home loan. Keeping debt payments low in retirement, when you don’t have full-time employment income, is important.
One example of today’s attractive rates: PenFed, (a credit union that anyone can join) is offering 30-year fixed rate mortgages with no points at 3.375 percent APR.
In recent years, it has become easier for retirees to refinance their mortgages, despite not having full-time jobs. Fannie Mae, the giant buyer of mortgages, will let most homeowners use a portion of their retirement savings as income when calculating their ability to qualify for a mortgage.
Here is how the math would work on a 30-year mortgage: Multiply your total retirement savings by 70 percent and divide by 360 (the number of mortgage payment in a 30-year mortgage). The result is the amount of your retirement savings that can be added to your monthly income on the mortgage application.
Imagine you have $1 million in a retirement account. First, multiply that by 70 percent, which is $700,000. Now divide that by 360 and you will get $1,944. You would then be able to add that $1,944 to other sources, including Social Security, as monthly income on a 30-year mortgage.
2. Refinance a Student Loan
Although you have probably paid off your own student loan debt by now, you might still be dealing with Parent PLUS loans for your kids. Fortunately, many private lenders are willing to refinance Parent PLUS loans. And their interest rates start as low as 2.14 percent. By contrast, today’s rate on new Parent PLUS loans is 6.31 percent.
The student loan refinance market is dominated by Silicon Valley startups like SoFI, which are willing to use newer forms of underwriting. They're also not as dependent on formulaic rules as traditional mortgage lenders.
If you have paid your bills on time, you have an excellent chance of being approved by one of these lenders. That’s also true if you’re retired, as long as you have meaningful retirement income.
Just remember that if you refinance a federal PLUS loan, you will give up the opportunity to take advantage of income-driven repayment programs. Those help make loan payments more affordable because they’re based on the borrower’s income and family size.
3. Refinance a Car Loan
Car loans can be refinanced, too, and their interest rates are surprisingly low these days if you have excellent credit.
For instance, LightStream, a division of SunTrust, offers auto refinancing rates as low as 2.24 percent. According to its website, LightStream’s lowest interest rate requires five or more years of credit history with no delinquencies or other problems repaying debt obligations.
Another popular way to refinance auto loans is with credit unions. They’re more likely than large traditional banks to look at your personal situation and offer low interest rates. You can find a credit union near you by using the website aSmarterChoice.org.
4. Refinance a Credit Card
If you have a credit card with a high interest rate (many now charge around 15 percent), the easiest way to refinance to a lower rate is by taking advantage of a 0 percent balance transfer offer. To qualify, you typically need a credit score of 680 or higher. You can often get approved with a lower score, however.
With most credit card applications, you are only required to declare your income, which can include retirement income from a 401(k) or other investment accounts.
Just remember a few rules with balance transfer credit cards:
First, you can only transfer debt between credit cards of two different banks.
Second, you might be charged a balance transfer fee, which averages 3 percent. If you can pay your debt off quickly, the fee is usually not worth paying. However, if it will take you more than six months to pay off your debt, the fee is usually worthwhile.
Finally, don’t be tempted to start spending on the credit card.
A final word to retirees: The Equal Credit Opportunity Act makes it illegal for lenders to discriminate on the basis of age. Although you might have to do a bit more work to verify your retirement income to lenders, you should be able to lock in today’s low interest rates and save.