Those over 40 face a different set of financial calculations
It’s often the most daunting and emotionally taxing item on one’s financial to-do list: buying a home. Most people wade into home ownership for the first time in their 20s and early 30s, when they still have the bulk of their working years ahead of them and a long runway to build equity — a key asset for eventually moving up to a bigger home.But what if you’ve reached midlife and still envision buying a home one day? Tackling that first home purchase after 40 can be easier in some ways than when you’re just starting out in your career, but it also brings its own set of financial factors.
“It’s important to consider the financial work you have left,” said Eleanor Blayney, consumer advocate for the Certified Financial Planner Board of Standards based in Washington, D.C., “the financial hurdles you still have over the rest of your life and how home ownership and debt in particular are going to impact that.”
A National Association of Realtors survey of people who bought a home from July 2011 to June 2012 showed nearly 80 percent of first-time home buyers were 32 or younger.In the next age bracket, those 33-47, 36 percent were first-time buyers; between the ages of 48 and 57, only 19 percent were first-time buyers. The rates of first-time home ownership generally declined as buyers got older, according to the survey, which featured 8,500 respondents.Even so, the past decade’s economic downturn and housing crash has forced many to put off that first home purchase.
Here are some things to consider if you’re over 40 and considering home ownership:
• Lending rules. Good news: Being closer to retirement age than buyers in their 20s and 30s can’t legally be held against you by a lender when they consider you for a home loan, regardless of the loan period. The decision on whether one qualifies for a loan hinges on the borrower’s income, assets, credit history and other factors. Banks generally look back two years to establish a borrower’s income history and also look to evaluate the likelihood that the borrower will continue to make the same level of income for at least another three years.
If you’re in your late 50s or early 60s and disclose that you’re planning to retire within three years, a lender will evaluate your projected earnings from Social Security, retirement accounts, dividends on investments and other sources.
• Benefits of paying off a loan. Most banks operate under the assumption that even a 30-year fixed mortgage will be swapped out for another loan within eight years, if not sooner. That’s because many home buyers often end up refinancing, or moving for work or due to family considerations.But paying off a home and owning it free and clear by the time one retires is a smart play, particularly as the cost of housing is a significant expense for a person relying on a fixed income.
That can be tougher for people who put off that first home purchase two decades into their prime working years, assuming they haven’t saved up money to make a hefty down payment — think at least 30 percent. But it’s doable.That could mean making extra payments during the early years of the loan or putting up more than the minimum down payment so the borrower is financing a smaller amount. A 15-year mortgage, which typically translates into lower interest but higher monthly payments, is another route to a quicker loan payoff.
• First-time buyer assistance. One of the biggest obstacles to home ownership is coming up with a down payment to qualify for a loan.Federal and state housing agencies offer assistance for first-time home buyers, including in many cases former homeowners who haven’t owned a home for at least three years.
Remember, though, while some loan programs allow home buyers to make a down payment of as little as 3.5 percent of the purchase price, experts say you’ll need to save enough for at least a 20 percent down payment to get the lowest interest rate and avoid having to pay private mortgage insurance, or PMI.