Mortgages should be treated as a part of your investment and retirement portfolio, provided you can manage them smartly. We will help you evaluate your mortgage strategy and undertake the best practices.
Younger Borrowers—why take the long, fixed-rate route?
The overall finance portfolio goals are quite different for younger and older borrowers. The younger borrower has a different perspective. The number of assets is less and the emphasis isn’t much on saving. Meeting the everyday expenses is the primary goal here. The credit history is at a nascent stage and home equity is limited. Younger lenders are more likely to undergo life-changing events. This includes finishing college education, getting a stable job, and getting married. They are more prone to selling, re-purchasing, and repeatedly moving.
A pre-concluded preference among older borrowers for fixed rate mortgages isn’t always the right strategy. This is particularly true for fixed-rate mortgages. Younger, first–time homebuyers are likely to stick to their homes for five-to-six years. This means saving the troubles associated with a fixed-rate home loan spread across several decades. It is better to undertake an adjustable rate mortgage and save on the interest rate. For the younger homebuyer, this means more savings due to lower payments. The amount saved can be diverted towards other purchases like a family car.
Early Exit from Mortgages—Younger Borrowers Need to Reconsider
Lending industry experts harp on the advantages of repaying a loan early. However, this isn’t the wisest decision when a high-interest debt is still active and you don’t have enough savings for emergencies. Younger investors tend to be braver, investing in products where high risks and higher returns are common. However, by paying the mortgage prematurely, this investment capacity is reduced. Loans that are structured according to your convenience are better. For instance, a loan that allows you to pay lesser when you are earning lesser makes a lot of sense.
Midlife Mortgage Strategy
By the time you are about 45, it is most likely that you have a well-defined investment portfolio. Your finances are more likely to have settled and you are decisive about the home you want to retain in the long run. Along with this, asset consolidation is likely to have progressed. This should be a period of preparing for your post-retirement life too. This doesn’t mean prematurely indulging in post-retirement luxuries. This is the time to seriously consider paying-off your mortgage so that your liabilities are reduced. Here, refinancing can be considered.
For instance, if you have taken a 20-year mortgage, you can think about refinancing it for 10-year duration with slight reduction in interest rate. What seems like a decimal reduction in rates, equates into thousands of dollars saved in the final repayment. However, this is applicable only if your finances are organized and you have set aside funds for your retirement savings.
Even if you are expecting an unpleasant financial turnaround, prepaying the 20-year mortgage still isn’t a bad choice. You can opt for biweekly payments instead of monthly payments to ensure your mortgage is wrapped-up without straining you too much. Most importantly, this is a financial commitment that you should be ready to stick to and might mean trimming your lifestyle expenses.
Mortgage Strategies for Retirees
Financial experts are rather apprehensive about mortgages for retired folks. This pessimism arises from a combination of a few factors. For starters, retirees aren’t too enthusiastic about a mortgage obligation once they have stopped earning. On the other hand, the housing sector is prone to slipping every now and then. So, having your investments concentrated in one property is also a bit risky.
This is why some retirees are ready to compromise part of their home equity for cash and invest somewhere else. This is the more common practice and seems relevant to folks beyond the 65-year mark. The recession did eat into retirement savings of many people. They can opt for refinancing to ensure that some liquidity is routed to their bank accounts.
Retirees struggle to get refinance options since lending institutions aren’t guaranteed of a regular income. Taking part-time jobs and even referrals from ex-employers don’t help their cause. The credit history, particularly in the last 2-to-3 years, is rather important. To make the loan approval smoother, limited expenses in the recent past can help. Similarly, the work history should be without too many gaps.