Getting a mortgage in retirement can be challenging, but not impossible. While most lenders shy away from providing 25-year mortgages to borrowers over 60, there are some options for seniors who want a longer mortgage term.
The Challenges of Getting a Long Mortgage in Retirement
Lenders are typically reluctant to provide long-term mortgages to older borrowers for a few key reasons:
- Higher risk of default – Older borrowers are closer to retirement or already retired. That means their income may be lower or limited to Social Security and other fixed retirement benefits. Lenders worry that older borrowers may lack the financial stability to make mortgage payments later in a 25-year term.
- Life expectancy – A 60 year old has a lower life expectancy than a 30 year old. Lenders want to ensure the borrower is able to repay the full term of the loan. Older borrowers are at higher risk of passing away before the mortgage term ends.
- Lower home values – Home values tend to increase more slowly for older borrowers. A 60 year old is less likely to gain significant home equity over a 25-year period than a younger buyer would.
These risks make most lenders hesitant to provide a 25-year mortgage to a borrower over 60. However, it’s not necessarily impossible if you meet certain criteria.
Strategies for Getting a Long Mortgage Term After 60
If you are set on getting a longer mortgage term in retirement, here are a few strategies that may help:
- Shop around – Some lenders may be more flexible than others when it comes to mortgage terms for seniors. Shopping around increases your chances of finding a lender willing to provide a 25-year mortgage.
- Make a large down payment – Putting down 30% or more shows lenders you are financially stable and lowers the risk of default. This makes them more likely to approve a longer term.
- Have great credit – Aim for a credit score over 760. Strong credit helps offset concerns about your age and retirement income.
- Use retirement assets – Lenders may be willing to include IRA/401k balances in assessing your ability to repay the mortgage long-term.
- Get a joint mortgage – Adding a younger co-borrower who will also be on the mortgage and title may reassure lenders about the risk of default over 25 years.
While challenging, satisfying some of these key criteria can improve your chances of getting approved for a 25-year mortgage after 60.
Alternatives to a 25-Year Mortgage
If you are unable to get approved for a 25-year mortgage, there are some alternatives to consider:
- 20-year mortgage – Reducing the term by 5 years may be more acceptable to lenders.
- 15-year mortgage – This shorter term poses less long-term risk for lenders.
- Adjustable rate mortgage (ARM) – Getting an ARM with a lower fixed period of 5 or 7 years can secure a lower rate for the early part of the mortgage.
- Home equity loan/line of credit – These tap available equity rather than requiring full underwriting. However, total borrowing costs are usually higher.
- Purchase a smaller/cheaper property – Opting for a lower purchase price requires less financing and may open up more mortgage options.
While not ideal for everyone, these alternatives may be a reasonable compromise depending on your financial situation and goals.
The Math: Monthly Payments on a 25-Year Mortgage at 60
To demonstrate the financial reality, let’s look at some examples of estimated monthly payments on a 25-year, $300,000 mortgage taken out by a 60 year old.
| Interest Rate | Monthly Principal & Interest |
|---|---|
| 6% | $1,775 |
| 7% | $1,932 |
| 8% | $2,090 |
This table illustrates how interest rates impact monthly costs for a 60 year old with a 25-year, $300,000 mortgage. At higher interest rates, monthly payments become quite substantial on this long of a mortgage term.
The Impact on Retirement Income and Lifestyle
These high monthly payments can squeeze retirement budgets that are often dependent on fixed incomes. Some key things for 60 year old borrowers to consider:
- Will mortgage payments impact your ability to cover other essential costs like healthcare, groceries, utilities, etc? Make sure to budget carefully.
- Will you need to continue working part-time to help cover the mortgage payment? How will that impact your desired retirement lifestyle?
- How will mortgage payments affect your ability to travel or pursue other interests in retirement?
- Could you downsize to a cheaper home that requires less financing, resulting in lower monthly costs?
Thinking through these lifestyle and budget issues is critical for older borrowers taking on a lengthy mortgage term.
The Impact on Home Equity
Older borrowers also need to consider how slowly they will build home equity with a 25-year mortgage started at 60:
- With longer terms and payments mostly covering interest early on, equity builds slowly.
- Older borrowers are less likely to see large home value appreciation over 25 years.
- Paying points to buy down the interest rate can further reduce equity accumulation.
These factors mean that starting a 25-year mortgage at 60 may limit your ability to tap home equity later on through products like home equity loans or reverse mortgages. Make sure to discuss this tradeoff with a financial advisor.
Home Equity Accumulation Over Time
| Years Into Mortgage | Approximate Equity |
|---|---|
| 5 | $60,000 |
| 10 | $125,000 |
| 15 | $195,000 |
| 25 | $300,000 |
This table provides estimates of how home equity grows over the course of a 25-year, $300,000 mortgage started at age 60, assuming moderate home appreciation.
Conclusion
Getting approved for a 25-year mortgage at age 60 can be challenging but is possible in some cases. While the longer term means lower monthly payments, retirees need to carefully consider the impact on their budget, lifestyle, and home equity accumulation in retirement. Working with an experienced mortgage broker and financial planner can help older borrowers weigh the pros and cons to find the most strategic mortgage term and financing approach.