Loan Options Become More Crucial for Those Over 50

Whenever you apply for a home loan, you have to ask yourself several questions.

Should you pick a fixed-rate loan or an adjustable-rate mortgage? A 30-year term, or 15-year pay-back schedule? Should you make a big down payment or a small one?

Although those are just a few of the questions all borrowers must ask themselves, the answers take on added importance if you’re over 50 years old.

“This could be the last mortgage that you’ll ever take out, so it’s crucial that you study all your options and plan several years ahead,” said Stacy Ann Schramm, a financial planner with IDS Financial Services in Glendora.

As a general rule, financial advisers encourage older borrowers to shun adjustable-rate mortgages and select a fixed-rate loan.

That’s because most older buyers will find themselves on a fixed retirement income relatively soon, and many would have trouble keeping up with their monthly mortgage payments if the rate on their ARM eventually shot skyward.

“The older you get, the less you can afford to take chances,” said Morrie W. Reiff, a financial planner at Planned Asset Management in Encino.

“If you’re only going to be in the home for a couple of years, an ARM might make sense because you’ll move before the rate has a chance to move up to market levels.

“But if you’re going to stay in the house for more than four or five years, take the fixed-rate loan,” Reiff said. “It’s a lot safer.”

Although most borrowers automatically select a 30-year pay-back plan, older borrowers should give serious consideration to taking out a 15-year mortgage, some experts say.

“Let’s say that you’re 50, and you plan on retiring when you turn 65,” said A. J. Schreiber, president of the Registered Financial Planners Institute in Amherst, Ohio.

“If you take out a 15-year loan, the mortgage will be paid off when you’re ready to retire and you’ll save thousands of dollars in interest charges (over the life of the loan) because you’ll pay back the principal twice as fast.”

Don’t assume that monthly payments on a 15-year loan would be twice the size of payments you’d make on a 30-year mortgage: Your monthly outlays would be only 20% or 30% higher because more of your monthly check would go toward principal instead of interest.

If you don’t expect to stay in your new home for the rest of your life, you should also consider taking out a seven-year “balloon” mortgage.

The typical balloon loan carries a rate that’s about half a point below the rate charged on 30-year mortgages. On a $100,000 loan, that’s a saving of about $35 a month.

Although the outstanding balance of the loan must usually be repaid in a lump sum when the seven years are up, monthly payments are based on a 30-year pay-back schedule. That keeps your monthly payments relatively low and annual write-offs for mortgage interest high.

“I’ve found that balloon loans are a perfect fit with a lot of my older clients,” said Gloria Shulman, a mortgage broker and owner of Crestview Financial Services in Beverly Hills.

For example, Shulman said, assume that you’re 55 years old. You’re buying a four-bedroom house to accommodate your spouse and teen-age children, but you expect to move to a smaller home when you retire at 62 and the kids trot off to college.

“The lower rate is going to save you money, and--assuming you go through with your plans to move when you reach 62--you can sell the house and use (part of) your proceeds to pay off the balloon,” Shulman said.

Still, balloon loans can pose some special problems for older borrowers.

Perhaps the biggest danger: If your plans change and you decide to stay put when the seven years are up, you might have to pay thousands of dollars to refinance the loan to stave off a forced sale of the property.

To avoid that potential pitfall, Shulman said, make sure that the contract you sign for your balloon loan includes a “rollover” clause.

The typical rollover allows the lender to make a one-time adjustment to the loan’s interest rate at the end of seven years if you’re not ready to pay the loan off.

“Your rate might go up a little bit when it’s readjusted, but that’s better than being forced to move out or having to pay a bunch of money to refinance,” Shulman said.

Once you’ve decided on a fixed- or adjustable-rate mortgage and you’ve chosen the loan term that best fits your personal financial situation, you’ll be faced with one more major decision: How big a down payment should you make?

“A lot depends on how much your retirement income will be, and how much money you have saved up,” said Bronwyn Belling, a housing expert with the American Assn. of Retired Persons.

For example, Belling said, it would be foolish to make a huge down payment or pay “all-cash” for your new home if it would exhaust all your savings.

“You don’t want to have all your money tied up in your house,” Belling said. “You need to have some money in the bank that you can tap if you run into unexpected expenses.”

A rule of thumb says that the typical American should have enough cash stashed away to meet six months’ worth of mandatory expenses--mortgage payments, bills for food and clothing, utilities and the like.

But older people should usually have enough cash on hand to meet 10 to 12 months’ worth of expenses, many experts say, in part because they’re more likely to run into large medical bills or other major expenses.

“First make sure that you’re comfortable with the amount of money you’ve got tucked away in savings or investments, and then decide how much you’ll put down on your new house,” said financial planner Reiff.

If you’re selling your current home and expect to make a large profit, Reiff said, you might want to use some of the windfall to make an unusually large payment so your future monthly payments will be small.

Conversely, you might want to make a relatively small down payment--say, 10% or so--if you’ll be able to handle larger payments on your retirement income or if you’ll need a lot of tax write-offs for mortgage-interest payments to “shelter” earnings from your other investments.

Fortunately, the Internal Revenue Service gives most older home-buyers an important tax break: If you’re 55 or older, you can keep up to $125,000 of the profits from the sale of your current home tax-free if the house you sell has been your primary residence for three of the past five years and neither you nor your spouse has used this one-time exclusion before.

“With all that tax-free cash, you should be able to make a pretty sizable down payment and still be left with a nice retirement nest egg,” Reiff said.

Of course, buying a new home always involves some important tax and financial-planning issues, regardless of your age.

As a result, you’d be wise to discuss your financing plans with your banker.