How Shortened Mortgages can Make Your Retirement Years More Pleasant

Let’s be honest, who would say no to an affordable mortgage?

As long as it’s not a scam and the terms and interest rate are clear, we’d say yes in a heartbeat. For many years, mortgages were designed so that they are more affordable for almost everyone.

As a general logic, if mortgage affordability is increased, homeownership rate will also increase. Affordable home financing appeals and attracts more individuals to consider buying a house.

To achieve this, lenders and mortgage experts started creating mortgages that required only 5 to 20 percent down payment and loan term that spans 30 years.

The Case About “Longer-Term-More-Affordable” Mortgage

Back in the 1920s, according to a VC Star report, mortgages typically needed a 40 percent down payment with a 10-year loan term.

This huge amount of money paid upfront as down payment made it hard for many to purchase a home. Which is why we have longer loan terms today. This is a solution to make mortgage more affordable.

Today, we don’t only enjoy a smaller down payment requirement, we also make lesser monthly mortgage payments. This is because the total loan amount is spread out over a longer time period. This made it possible for us to budget our finances to fit mortgage and our other financial obligations.

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The Potential Problem with Lengthier Mortgages

According to the National Association of Realtors 2016 Profile of Home Buyers and Sellers, the median age of first-time homebuyers is 32 years old. First-time homebuyers comprise 35 percent of total homebuyer population. Taking this data as a basis, a 32 old buyer who has a mortgage with a 30-year loan term will ideally pay it off at the age 62.

Working Americans expect to retire at 66, according to a U.S. News report. Moreover, the average retirement age among retirees is 62. That being said, some Americans will still be paying their mortgage a few years or right before retiring.

This isn’t a problem for someone who enjoys a stable job and a constant flow of income. However, those who enter retirement bring with them a mortgage balance may face certain challenges. With a more limited source of income in the form of pension or retirement savings plans and ever-changing needs in health and finances among others, a mandatory monthly mortgage payment can be difficult to sustain.

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A proposal For a Better Fix-rate Mortgage

Federal Reserve Board Economists Wayne Passmore and Alexander H. von Hafften suggested an approach which may help address this concern.

In their working paper entitled “Improving the 30-Year Fixed-Rate Mortgage”, they proposed a way to fix the major flaws in a 30-year fixed-rate mortgage by creating a new fix-rate mortgage program called “Fixed-Payment-COFI mortgage”. Essentially, the idea is to speed up the rate to which home equity grows by trading off refinancing for larger principal payments. To learn more about this proposal, click here.

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Ways to Help Shorten Mortgages

While the intriguing proposal is still under discussion. There are effective ways of shortening your mortgage:

  1. Pay more. If you don’t have any prepayment penalty to think of, paying more allows you to pay off your mortgage faster.
  2. Refinance to a shorter-term. When you do this, make sure your payments remain within the bounds of your financial capability. Refinancing to a shorter term will have you paying slightly higher each month. The good thing is that you will pay off the mortgage faster with a lesser interest applied to it.
  3. Choose Biweekly Payments. You may wonder how this can make a difference.  In a year, there are 12 months or 52 weeks, If you make payments every two weeks that will be equal to 13 months of mortgage payments by the end of the year. That means you’ve made one extra month of payment without noticing it.

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