Does It Make Sense to Get a 30-Year Mortgage at Age 66?

Paul Solman frequently answers questions from the NewsHour audience on business and economic news 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.

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

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.”

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 $ 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.

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.

Don’t worry about the lender

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 i thought about this 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.

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