14

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?

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    Can you be more specific? Are you asking why a 55-year old would take a 30-year mortgage? I'm not sure what you're asking that has to do with age (or "retirement-plan"). – D Stanley Sep 20 at 16:55
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    I got a 30 yr mortgage at age 74 and age was not a factor to the bank. – blacksmith37 Sep 20 at 19:48
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    Are you asking whether you can get a mortgage or whether you should get a mortgage? Those are very different questions. – Ross Millikan Sep 21 at 4:55
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    Can you afford to buy the home outright with cash? If not, you'll need a mortgage, so practicality doesn't really apply. – Barmar Sep 21 at 13:38
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    It doesn't matter if the mortgage is not paid back because the bank can sell the house they own instead. – Stop Harming Monica Sep 21 at 14:41
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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.

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    This anecdote doesn't really answer the question. – Stop Harming Monica Sep 21 at 14:38
  • On rereading the question, you are right. I’ll edit when I have a moment. – JTP - Apologise to Monica Sep 21 at 14:52
  • I hope you don't mind me asking, but how did you plan to pay it? – Joshua Sep 22 at 4:10
  • Our retirement account annual withdrawals are just less than what we were earning. Less 20% (for not needed to have ‘savings’ as a budget item, 7.65% as no FICA, and about $10K for no college saving. Little difference than 26 years ago when I first arranged a HELOC. – JTP - Apologise to Monica Sep 22 at 12:58
  • In my case, the low LTV (loan to value) was enough - guessing it was first position too? Or at least it was only behind that lender's mortgage? A first position line of credit at a low LTV to someone with a good credit score is pretty much the slam dunk of mortgage lending. – dwizum Sep 23 at 12:42
17

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.

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    Person dying off isn't that bad for the bank; house will almost certainly be sold by executor and loan paid. – Joshua Sep 22 at 4:12
  • @Joshua not sure about the US, but in the Netherlands there's also almost always a life insurance policy to the amount of the mortage required when taking out a mortgage, with the mortgage holder (aka the bank) the beneficiary. Obviously the premiums for that will go up a lot when closed at a higher age. – jwenting Sep 23 at 8:53
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    @jwenting I have never taken out such an insurance policy in the UK (not doubting your experience in the Netherlands, just adding an additional international data point). – Martin Bonner supports Monica Sep 23 at 9:06
  • @jwenting - My experience with an older person taking a mortgage in Spain several years ago, is that the bank asked for a second person to avoid a very expensive life insurance on the older one. – Pere Sep 23 at 9:14
  • @jwenting in the UK such policies don't normally pay the bank directly. They are more likely to pay out to the spouse or child who relies on living in the house. Those are quite common, despite Martin Bonner's point. They may be taken out through the mortgage company and linked to the mortgage values, or may be standalone. – Chris H Sep 23 at 14:38
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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.

  • I agree--I don't even think it's useful to assume you will pay off a mortgage at all. The amount of money you make (or lose) when you sell the house will have little to do with the mortgage, it is almost all based on what you paid for the house and what you sold it for. If you hold on to a house long enough to pay off the mortgage you've probably lost a good deal of money in missed opportunities. – Bill K Sep 23 at 15:43
  • @Bill K: Depends on what you think of as opportunities. Some of the fruit & nut trees I planted when I bought this house ~20 years ago are just reaching bearing age. – jamesqf Sep 23 at 18:22
  • @jamesqf True, I did mean financial opportunities, there is immense immeasurable value in living in the same house and neighborhood, especially while raising children. – Bill K Sep 23 at 18:29
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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 looks like we posted similar answers at the same time. I upvoted yours for including the link to the HMDA data since I missed that. – dwizum Sep 20 at 17:47
1

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.

1

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.

0

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.

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Frame Challenge

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.

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    I disagree. While you may not NEED the mortgage, you might want one. Say you can sell your former residence - the one you're downsizing from - for a profit of $250K. You could either use that to buy a downsized residence free & clear, or you could use $50K for downpayment & costs, get a mortgage at say 3% for the balance, and invest $200K in index funds that have historically returned around 7%. – jamesqf Sep 21 at 3:57
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    @jamesqf "get a mortgage at say 3% for the balance, and invest $200K in index funds that have historically returned around 7%". The mortgage needs to be paid every month, yet the money is tied up in the markets. – RonJohn Sep 21 at 12:06
  • But typically you will have other income - work, pensions, Social Security - that will be sufficient to make the payments. – jamesqf Sep 21 at 16:35
  • @RonJohn, en.wikipedia.org/wiki/Dollar_cost_averaging, ETF's let you sell every day, it is not "tied up" in the market. It would be very much "tied up" in a house. – Sam Sep 23 at 15:54
  • @Sam sure you can sell every day. But you're only "guaranteed" to get 7% in the long term. Selling during a downturn in order to get the monthly payment is... suboptimal. – RonJohn Sep 23 at 16:04

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