Refinanced mortgages could haunt you into retirement
WASHINGTON - Malcolm Buckey would be 97 years old when the 30-year mortgage on his dream home in Ponte Vedra Beach, Fla., is paid.
Walter Molony of Annandale, Va., would be 84 when the last payment comes due on his 30-year loan.
For many middle-aged homeowners, taking advantage of low mortgage rates will have an unintended consequence: As retirees on reduced incomes, they could have mortgages to contend with.
Experts say these people should consider their financial strategies carefully when opting for a 30-year loan rather than one for 10 or 15 years.
"You could have a significant financial problem if things don't go as planned," said Mark Zandi, chief economist at Economy.com, a research firm in West Chester, Pa. "For instance, your income isn't as strong as you thought it would be, and you won't be able to pay off your mortgage as quickly as you had thought. Or home prices end up being a lot weaker than you expected, and you won't be able to sell and pay off the mortgage."
People of average financial means should try to avoid having mortgage payments when they're retired, financial experts say. Nonetheless, it can make financial sense for some people to take out a longer-term loan.
In general, people in their 40s and 50s are enjoying their peak earnings years. This can make people better able to handle a shorter-term mortgage, but a longer-term one might offer more financial flexibility.
Buckey sold a house in Richmond, Va., to get the cash to pay for his ranch-style house in Florida. He decided to finance about 20 percent of the new house with a 30-year loan because the lower monthly payments offered flexibility. Plus, he would get a tax break.
"It was a budgeting issue," he said. "We wanted to make improvements."
Extra money for home-improvement projects or retirement investments are among the reasons older people cite when going for 30-year mortgages.
Molony, 54, refinanced his mortgage twice this year and went with a 30-year loan each time.
He and wife, Cathy, took out a larger loan in March and used the extra cash to make extensive repairs and upgrades on their house in Annandale, Va., as well as to pay off the mortgage on a cabin in the West Virginia mountains. He refinanced again in June to lower the monthly payments further.
There's a tax break to consider, said Greg McBride, a financial analyst with Bankrate.com, an online financial service. "By taking out a 30-year mortgage, you are paying down a lot less principal in the longer term, getting a larger tax deduction through the interest you are paying," he said.
Experts say middle-aged homeowners who take out 30-year loans are likely to pay them off ahead of time. They might be banking on a sharp rise in the value of their homes, which could be sold long before the 30-year loan is finished, leaving them with a tidy profit. Or they might be expecting a huge bonus or some other cash windfall that could be used to pay off the loan early.
Buckey plans to pay an additional amount to the principal each month. "It could be 20 years when I'm done," he said.
Doug Duncan, chief economist at the Mortgage Bankers Association of America, said the average life of a 30-year mortgage "is probably seven or eight years," meaning it's paid off in that period through refinancing or early repayment.
This trend has been heightened in recent years as millions of homeowners have moved to refinance mortgages to take advantage of the lowest rates in four decades.
In mid-June, the rates on benchmark 30-year mortgages slid to 5.21 percent, a record. Shortly afterward, rates started rising a bit, but they have gone down again in recent weeks.
AARP spokeswoman Sally Hurme, who deals with consumer protection, advises people to ask themselves questions like these:
How would I make the payments if I weren't working?
What expectations do I have about appreciation of the property?
Is this the place where I will live for the life of the loan?
How much debt am I going to be able to manage if my income is reduced?
When people refinance and take out loans larger than they need to finance a house, she said, they ought to think carefully about what they're going to do with the extra cash: for example, debt consolidation, paying for children's tuition, taking a trip around the world.
Some experts believe that the baby-boom generation is less worried about carrying mortgage debt into retirement.
"The sort of joy and sense of personal accomplishment to have paid off my mortgage and be able to leave my house free to my kids is one of those ingrained personal-finance philosophies we know of the older generation," Hurme said. "I think that boomers are not as debt-averse as their parents."