Issue 36.16
When I am working with many of our senior clients on mortgage planning someone will always say, “Why would I ever look at a 30 year mortgage when I will never pay it off at my age.” So, this month, let’s just take a simpler approach to mortgages as a senior.
Let’s say we are in our 60’s or 70’s and we are purchasing a home today. For simplicity sake in this example, you are buying a home for a purchase price of 300,000 and putting down 100,000 and borrowing 200,000.
We can either borrow 200,000 with a 30 year fixed at 4% and our payments will be 1000.00 per month or we can borrow 200,000 at 3.5% with a 15 year loan and our payments will be 1400.00 per month. Many of my clients will want to take a 15 year loan out because of their age. And, this is fine, if you are more than okay with making the higher payment. But, let’s look at the pros and cons to you and your spouse.
First, a 30 year fixed is a smaller payment of course. You will be saving 400.00 per month between you and your husband for the rest of your life basically. That 400.00 per month or nearly 5,000 per year is a big deal when you are on fixed income and could really use that extra 400.00 for dinners and travel and enjoying life a little. Granted, in a 15 year loan, you are putting more equity in the home each month for your kids, but it also costs you 400.00 extra per month out of your pocket.
The real difference or savings is the difference in interest rate. With a 30 year fixed above you are paying about an extra half percent per year on a 30 year loan versus a fifteen year loan. So, on the loan amount of 200,000 you would save 1,000 per year in interest if you made a higher payment each month. You would pay an additional 4800.00 per year out of your pocket, by going to a 15 year loan, but your kids would get the benefit of having an extra 1,000 in equity in the home when you pass and they get the home. So, let’s say, you pay 4800.00 per year for ten years. And, you pass. You and your spouse paid in 48,000 extra over the ten years and your four kids in essence benefitted by 10,000 in more equity. So, essentially you two paid an extra 48,000 out of your pocket so your four kids can split and have an extra 2500.00 each. 10,000 extra split among four kids and they will love you a little more.
Sounds like I am exaggerating, but in essence that is the difference. If you are 30 or 40 there is a major shift in mindset just like all investment vehicles. I guess my point is just that. My seniors with shorter term notes will pay a ton for that equity to be passed to their kids. It most likely will never benefit my clients because they won’t pay their home off completely, but they will pour their guts out with their fixed income so that the four kids can split up an extra 2500.00 and have it spent in the first 60 days once you’re gone. I know that sounds cynical, but truly what I have seen over the last 15 years.
I’m a little more concerned about my clients than your kids. I believe my clients could benefit greatly with the extra 400.00 per month in their retirement than the kids will. And if one of you pass, you usually lose some income in social security or part of a pension and then the remaining spouse really has a tougher time with that higher payment of a 15 year loan. Please remember you can always commit to a lower payment and then certainly pay more anytime you want to put more down in equity. The 30 year fixed just allows you to keep a base payment that is affordable and then allows you the flexibility to pay additional at any time you choose, but we are not stuck every month with a higher payment.
Finally, let’s say you are a senior and you have paid down your mortgage and only owe 100,000 left remaining. You have 15 years left on your loan, and it will be paid off. But, at age 70, sometimes you worry that you will have the time to pay it off. Your payment is 1000.00 per month. But, I will also look at putting you in a 30 year loan and reduce your payment in half to 500.00 per month.
You think I would be crazy, because I am setting you back to 30 years when you only have 15 years left to pay on the loan! True, but you may only have 15 years of life! So, the last thing I would want you to do is to pay your guts out and then pass and all of those payments have helped your kids, but certainly you and your wife never benefitted personally.
And, the down side always of putting you in a 30 year fixed is simply that your kids will owe more on the home when you have died and they get the home of course then if you were to continue to pay higher payments in the 15 year loan. At the end of the day, I don’t think your kids would really care if they still owe, 50,000 on a home when you pass. They will still sell the home and split the equity up among the kids, so maybe there is 50,000 still owed. But, you have also saved 500.00 per month for the past 10 years.
I guess simply that everyone looks at a 30 year fixed loan when you are in your younger years. But, in reality, my seniors can and could benefit greater with their fixed income and flexibility at this age than perhaps my younger clients. Something to think about until next month.
Brandon can be reached at 435-674-9200.