PBS NewsHour business and economics correspondent Paul Solman is now answering questions from Next Avenue visitors about personal finances, business and the economy. His advice will appear on Next Avenue as well as Solman’s PBSNewsHour blog, Making Sen$e With Paul Solman, and the Rundown, NewsHour’s blog of news and insight. PBS NewsHour is an hour-long television program and accompanying website with the mission of providing intelligent, balanced and in-depth reporting and analysis of the day’s most important domestic and international issues and news.
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I am 66 years old, with a retirement income of $52,000 (pension and Social Security). Can I get a 30-year fixed-rate mortgage? If yes, does it make financial sense to do this? —Jim Raymond
You mean, I think: If you’re 66, does it make sense to take out a loan that will only be paid off at age 96? Won’t a lender say, “Forget it — you won’t live long enough”?
Don’t worry about the lender. A standard rule of thumb applies, regardless of your 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 $4,653.41 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 other kinds of income, which can end abruptly at any moment. (By the way, why not call a mortgage broker?)
As for the “should you?” part of the question, the answer is: It depends.
3 Factors to Consider
By that, I mean that the decision to take out a 30-year mortgage at 66 depends on your alternatives, your expectations for inflation, and how long you expect to keep the loan.
As it happens, I may be in a similar situation. My wife and I had a 7/1 adjustable 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, my prime concern is how long we plan to stay in our current home. And that’s why I have not applied for 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 let’s say the upfront fee, aka “points,” would be $1,500.
Interest Versus Principal
The first problem with taking out a 30-year fixed-rate mortgage now is that the repayments are front-loaded. That means you’re disproportionately paying off the interest debt, as opposed to the principal, 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 a lender might charge for the mortgage. Spread out over 30 years, $1,500 upfront is only $50 a year. Spread out over five years (the length of time we might stay in our home), it’s $300 a year.
An Inflation Hedge?
Another key consideration: Taking out a 30-year fixed-rate loan when the interest rate is as historically low as it is right now (about 3.7 percent) makes great sense as a hedge against inflation. If inflation spurts, you benefit with the low fixed rate. If inflation drops even further, you can refinance yet again.
But the hedge lasts only as long as you keep the mortgage. If you plan to leave the property — and thus the mortgage — in a few years, you’re betting that inflation will rise substantially within that time frame.
Your Mortality and Your Mortgage
Finally, there’s the issue of mortality. Since one of my most cherished books is The Denial of Death, I may be the wrong adviser here. But should futurist Ray Kurzweil be wrong in predicting that we’ll have conquered death within 15 years, as he did here on Making Sen$e, then you and I both have our 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.
Paul Solman is a member of the Twitterati and can be followed at Twitter@paulsolman. His daily blog can be followed, well, daily at Making Sen$e by linking here, or just Googling the words: “Making Sense.”
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