Should “Old” People Get Mortgages?

Over at PBS NewsHour Paul Solman looks at the question of whether a 66-year-old retiree is a good candidate for a 30-year fixed-rate mortgage.

“Don’t worry about the lender,” says Solman. “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.”  (See: Does It Make Sense To Get a 30-Year Mortgage at Age 66?)

Actually, an alternative rule of thumb is this: A lender can’t deny credit to a borrower on the basis of age because it’s discriminatory under federal law. Only income and credit count, not wrinkles.

Mortgage Guidelines

As to allowing 45 percent of your monthly income for housing costs that’s hardly a good idea even if allowed by lenders. Conventional loans, for example, limit housing costs for such things as mortgage principal and interest and property taxes and insurance (PITI) to 28 percent of an individual’s income. Rather than 45 percent, a better goal is to pay as little as possible for housing costs, especially for those on a fixed income.

But past the discrimination and affordability issues one really needs to ask if it makes sense for an “older” person — say a 66-year old like me — to take on 30-year FHA mortgages, VA financing or conventional mortgages at retirement or thereabouts.

Solman says “it depends on your alternatives, on your expectations for inflation, and on how long you expect to keep the mortgage.”

Solman also points out that with today’s low mortgage rates getting a home loan at a fixed rate is really a hedge against the higher rates which we may see in the future.

Intergenerational Loans

Good points, however there are also very practical reasons why those of retirement age and older who can afford it should consider a mortgage.

First, by refinancing a home older borrowers may be able to help adult children acquire a home of their own by providing gift money that can be used for a down payment and closing costs.

Second, if the loan is large enough older parents can simply buy a house for an adult child – and the child, being an adult, can then pay rent to the parent which is equal to the cost of the mortgage including taxes and insurance. The property can then be left to the child in the will.

Third, in today’s world many people are having a tough time financing real estate. Fed Chairman Ben Bernanke tells us that even when borrowers are willing to put down 20% they still are unable to qualify in too many cases.

It may be that the adult children would like to own the home that their parents now occupy but while they can make the monthly payments they can’t qualify for a mortgage on their own. Well, good news folks: If the children get the property through inheritance and the home has a mortgage that loan cannot simply be accelerated (called) by the lender because the original borrower has pasted on.

Why? Under the Garn-St. Germain Act a lender cannot stop “a transfer to a relative resulting from the death of a borrower.” In other words, as long as they pay the mortgage a lender cannot prevent the children from taking on the debt — even if the interest rate is at today’s low levels and tomorrow’s rate is far higher.

Oh — and one other thing. Despite the implication of the PBS question, in some households 66 is not old, not elderly and not ancient or likely to be either retired or interred. My father was a CPA until almost age 90, my mother was up and about past that age and various other relatives were alive, well, sentient, and working until my father’s age and later. And why not — just consider the alternative….

For details and specifics concerning mortgages and estate planning, speak with a fee-only financial planner and an attorney who specializes in elder law.

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