Many people today wait until later in life to tackle the challenge of homeownership. Getting out from under student debt takes time, and potential homeowners are working hard to ensure they have the funds to cover their monthly payments. As a result, people are often continuing to make mortgage payments into their 60s – and even past retirement. Here are some tips to shorten your mortgage if you are thinking of homeownership later in life.
Mortgages Then and Now
Back in the 1920s, the average homeowner paid about 40% down and made the remaining payments over the course of only 10 years. People in those days didn’t live as long as they do today, so these terms allowed for what was then considered to be affordable homeownership. It allowed people to spend the first couple decades of their adult lives saving for the down payment, and then paying off their homes quickly. This was ideal at the time and worked well for many people.
Over times, things changed. These days, the most common mortgages require 30-year terms, and while lenders recommend 20% down payments, most people put down about 5%. For people who are now living longer, and with the average age of retirement being about 65, more people than ever before are entering their retirement years with a mortgage balance still over their heads. This can be problematic.
Is There a Fix?
While it’s likely that the 30-year mortgage will not be going anywhere any time soon, two economists working for the Federal Reserve Board wrote a paper called “Financing Affordable and Sustainable Homeownership with Fixed-COFI Mortgages.” In it, the two propose allowing homeowners to give up their right to refinance to a more affordable monthly payment in exchange for the ability to pay off their mortgage balances early without penalty. Oftentimes, lenders charge penalty fees to aspiring homeowners who pay off their balances early, and while this may seem unfair, there’s a reason for it: banks rely on and expect the interest for the full term of the loan.
Though fixed-COFI mortgages do not yet exist, there are some alternatives for shortening your mortgage. Of these, one of the best involves considering whether you can fit the payments associated with a 15-year mortgage into your budget. Even if you buy in your late 30s, you would still pay off your home well before retirement, which reduces risk and allows you to enjoy your post-retirement years without a mortgage payment hanging over your head each month. Though a 15-year term isn’t for everyone, it is by far one of the best ways to ensuring a happier, more financially stable future.
Whether lenders will run with the idea of allowing homeowners to pay off their balances early without penalty in exchange for giving up their rights to refinance for lower monthly payments remains to be seen. Though it could work in theory, lenders would need to work out some kinks and allowances for traditional ARMs, perhaps by putting more of the homeowner’s mortgage payments toward the principal balance from the start.