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I understand that lenders cannot discriminate based on age, but is there really data to support that lenders do not do that?
But suppose if one gets the mortgage when he/she is 55 years or older and has a job and sufficient assets (and is downsizing the home), my question is what are the pros and cons of taking a mortgage from a financial perspective?
I am 56. One year ago, I applied for a HELOC. The terms were 15 year draw, and then a 10 year amortized payoff. In effect, a 25 year loan.
I started the conversation (all done over the phone, not live) by saying I was retired, and had no W2s to offer.
I was nearly instantly approved, the bank did do a drive by appraisal, and that was it. Ignoring the early retirement, the loan ends when I’m 80, well past even normal retirement.
While this was for a HELOC, most banks write a mortgage and quickly sell it to the secondary market. The bank cares about having the details correct and not the age of the applicant. In my case, the low LTV (loan to value) was enough. For a home purchase, that’s key, along with the buyers debt to income.
Pro - you can live where you can afford, even without having to liquidate assets to buy the home with 100% cash.
Con - it’s a monthly obligation. Many will say to plan a mortgage to end coinciding with retirement. My last main mortgage refi occurred earlier in the year we retired. I took a 15 year term, and never regretted that. 7 years left at which time 15% of our budget frees up.
You asked two questions. First,
I understand that lenders cannot discriminate based on age, but is there really a data to support that lenders do not do that ?
Considering your United States tag, it's worth noting that the Equal Opportunity Credit Reporting Act, the Fair Housing Act,and the Home Mortgage Disclosure Act were intended to prevent discriminatory lending practices. As part of those regulations, lenders are required to report data about loan applicants (both those who were approved and those who were not) and regulators essentially look for patterns in the data to determine if there is any wholesale discrimination. The Federal Reserve Bank makes annual reports to congress, these reports include analysis of the reported data - which is probably the closest thing you'll get to data supporting whether or not lenders discriminate based on age.
You also asked,
suppose if one gets the mortgage when he/she is 55 Years or older and has job and sufficient assets ( and is downsizing the home), what is a pros and cons of taking a mortgage from financial perspective ?
The pros and cons don't have any inherent link to your age - all else being the same, they should be the same as the pros and cons at any other age.
Of course, there are some obvious things that probably won't be equal - many people live off retirement savings or other investment income later in life, versus working for a salary. If this means you will be on a fixed income, a mortgage may actually make slightly more sense than other forms of housing, since your payment is fixed for the duration of the loan (versus, say, renting - where the landlord may increase rent to match inflation over time.)
There's also an increased chance that an older person may die before the loan is paid off, compared to someone of a younger age. How this impacts your estate as it's passed on to your heirs may be worth considering, too.
In terms of the mortgage process, lenders typically need proof of income in order to show that you will be able to pay the loan off over time. For someone who is working, this is easily done by providing pay stubs or tax returns. If you are retired, or will retire soon, you may need to work with your lender to make sure you're providing proof of your income and proof that it will be stable over time. Generally speaking, having lots of assets isn't inherently taken as proof of income - especially if the assets are liquid (i.e. cash in a savings account). The lender will want to know that you will have a stable cash flow, whereas just having a pile of money may be more risky since there's nothing stopping you from blowing it all in the first year of the mortgage.
Remember that mortgages are secured loans. Most 30-year mortgages are paid off early when the homes are sold in less than 30 years. So the expectation that the borrower is going to make the last payment 30 years later is not part of the equation. The lender mainly cares whether (1) the borrower can currently afford the monthly payments and (2) the down payment is large enough to protect against the home going "underwater" in a downturn, which could impose a loss on the lender. In the latter case, even borrowers who could keep paying often walk away instead (strategic default). The downsizing 55-year-old probably has funds for a large down payment, and the risk in the mortgage would be minimal even though the borrower is likely to retire or die within 30 years.
Every mortgage bank in the country is required to send the government information about every loan application they take, every decision they make, and the demographic characteristics of every borrower (or potential borrower) as part of HMDA (Home Mortgage Disclosure Act). All that data is publicly available and the government itself uses the data to ensure that banks aren't discriminating on the basis of age or any other protected characteristic.
As for the pros and cons, those don't really change much with age. Many people build their retirement plan around the idea that they'll have their mortgage paid off before they retire so that they need less income in retirement. But it's equally reasonable to plan to have a mortgage payment in retirement and to ensure that you have enough assets to handle that payment once you stop working. Beyond that, it's a matter of personal preference and a question of what alternative(s) you're considering.
It used to be that having tax deductable mortgage interest was an important advantage of a mortgage. However, deducting mortgage interest is no longer viable for many taxpayers because the interest rates are very low and the new higher standardized deduction means that the standard deduction may be more than your interest payments and other deductions. (This obviously varies a lot depending on your location and how big a house you need. Where I live you can buy a house for $35K, but if you live somewhere that starter homes cost $500K it's different.)
If you do use a mortgage you could invest the extra cash that you didn't spend on your home in hopes of earning a higher rate of return than your mortgage interest rate. However, the mortgage interest rate is fixed (unless you take an adjustable rate mortgage) and the return that you would get on your investments is variable, so you could end up paying more in mortgage interest than you make on your investment of the cash not spent on the house.
It really doesn’t matter when the mortgage is taken out, from a lenders perspective; most loans are refinanced, bought out by another lender or paid off years before the 30yr term. Banks always get their money. From a home owners point, if it makes life more affordable then lower the payment through a refinance. After tax considerations it’s cheap money and unless you want to skimp in life to leave it all to your kids, extend it out and live.
Most 30 year mortgages last less than 8 years before there is a change in their expected life cycle. Refinance, restructure, payout, and ...reversal. The bank does not mind, they will use a scorecard to approve the loan.
At 55 you might also expect to come into a lump sum sometime in the next 20 years.
The term is just an attribute. Do you have a specific objective to reach by repaying over 10 years instead? Think of your cash flow.
Other countries, notably Japan, have much longer terms, and are effectively interest only for some time after establishment. Said interest is pretty low nowadays.
A longer mortgage will also free up cash that may otherwise cost you to obtain. Nobody else will lend you money at this rate.
The risk with a variable rate is that in 10 years time, rates may be higher.
The whole point of "downsizing the home" is to sell the current bigger house and buy a smaller house.
While that smaller house might be some place expensive, you still won't need a 30 year mortgage.
