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Does It Make Sense To Get a 30-Year Mortgage at Age 66?
A view of the Trump Tower on 5th Avenue in New York. Photo by Timothy A. Clary/AFP/Getty Images.
Paul Solman frequently answers questions from the NewsHour audience on business and economic news here on his Making Sen$e page. Friday's query comes from a reader at Next Avenue. The NewsHour has partnered with Next Avenue, a new PBS website that offers articles, blogs and other critical information for adults over 50.
Can a 66 year old retired man with a retirement income (pension and Social Security) of $52,000 get a 30 year fixed rate mortgage? If yes, does it make financial sense to do this?
Paul Solman: Hi, Jim. Please forgive the rant that went up first thing this morning on Making Sen$e and the Rundown, and is reprinted below. I simply didn't understand the thrust of your question.
You mean, I think: if someone is already 66, does it make sense to take out a loan that will only be paid off when s/he's 96? And will a lender say: "Forget it. He won't live long enough."
Don't worry about the lender. A standard rule of thumb applies, regardless of age: So long as your mortgage payments are no more than 45 percent of your gross income, you should be able to get the mortgage. And since Social Security and pension income - the latter up to the federal guarantee limit of $4653.41 a month for 2012 -- are as close as you can get to a sure thing these days, the lender should be more reassured than with regular income, which can end abruptly at any moment.
(By the way, why didn't you call a mortgage broker?)
As for the "Should you?" part of the question, the answer is: it depends. It depends on your alternatives, on your expectations for inflation, and on how long you expect to keep the mortgage.
As it happens, I may be in a similar situation. My wife and I had a 7/1 mortgage that fixed a rate for seven years and then went to a variable rate, which is where we are now. So we've been considering a switch to a 30-year fixed. Frankly, the issue of age had never occurred to me, but I guess that could be because of my devout immaturity.
When I consider the mortgage alternatives, prime among them is how long we plan to stay in our current home. And that's why I have not applied for a 30-year fixed refinancing for the roughly $300,000 remaining on our mortgage.
Say we'll be here another five years, just for the sake of running some numbers. And for the same reason, let's say the upfront fee, aka "points," would be $1500.
The first problem is that mortgage repayments are front-loaded. That means you're disproportionately paying off the interest debt in the early years. Those with fixed rate mortgages have surely noticed this: the principal barely budges in the first few years. So why replace a mortgage like ours, where something like half the payments are now going to pay down the principal, with a mortgage that reverts to payments devoted almost entirely to interest?
That front-loading has been enough to discourage me from considering a switch. But an additional discouragement would be the points. Spread out over 30 years, $1500 up front is only $50 a year. Spread out over five years, it's $300 a year. That can make a big difference in the APR - the Annual Percentage Rate. And since the whole point of switching to a 30-year fixed is to lower your interest rate, the APR is a key metric.
A penultimate consideration. Taking out a 30-year fixed-rate loan when the interest rate is as historically low as it is right now makes great sense as a hedge against inflation. If inflation spurts, you benefit. If it drops even further, you can refinance yet again.
But the hedge only lasts as long as you keep the mortgage. If you plan to leave the property in a few years and thus leave the mortgage as well, you're betting that inflation will rise substantially within that time frame.
Finally, there's the issue of mortality. Since one of my most cherished books is "The Denial of Death," I may be the wrong advisor here. But should Ray Kurzweil be wrong in predicting that, we'll have conquered death within 15 years, as he did here on Making Sen$e, and http://www.pbs.org/newshour/rundown/2012/07/ray-kurweils-immortality-cocktail-student-loan-skeptic.html) then you and I both have demise to consider. To me, mortality has no influence on the mortgage decision. I'm trying to maximize my assets as it is. That can only benefit my estate, should there be one, regardless of when the bucket is kicked; the farm, bought. But I suppose that if my wife and I were both to begin dining on dust in the near future, the thoughts about mortgage duration should apply (see above). In this case, I think I'll go with Kurzweil.
One last comment, Jim, it was only after re-reading your question and my answer that I got your drift (I think). And even so, it provides none of the key information one would need to provide a reasonable answer. So I'm preserving my original response, below. And if I'm now wrong and your question actually meant what I first thought it did, then I stand by what I originally wrote. In any case, it has a few funny lines that I'd hate to deny posterity.
As usual, look for a second post early this afternoon. But please don't blame us if events or technology make that impossible. Meanwhile, let it be known that this entry is cross-posted on the Making Sen$e page, where correspondent Paul Solman answers your economic and business questions.
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