How to buy your first home after 40
By Caroline Banton/GOBankingRates
The median age of home buyers has increased from 39 to 44 over the last five years, according to the National Association of Realtors.
Although over-40 first-time home buyers face concerns that younger generations do not, buying a first home at any age is an opportunity to manage finances, and it can be a step in preparing for retirement. Finding a trustworthy real estate or financial advisor can alleviate the concerns associated with such a financial commitment.
"One client that I worked with purchased her first home in her early 60s," said Bruce Ailion, a broker with Re/Max in Atlanta. "She was insecure, and buying a home was a very big step for her. When it came time for earnest money, she invited me to her home and took cash out of the pillows of her couch. She did not have faith in banks."
People over 40 have less time to pay off a mortgage before they hit retirement. They might have significant expenses in other areas, such as college fees for children, or they might have simply held back in committing to a home purchase. Homeownership can stabilize housing costs, avoid incremental rental costs and provide tax benefits, but it can also bring property taxes, insurance payments and maintenance headaches. Challenges can include finding the right financing and getting a down payment together. Individuals should sit with a trusted financial planner, determine retirement goals, do the math and ensure the best decision.
Click ahead for some tips on how to buy a home later in life.
This article, How to buy your first home after 40, was originally published on GOBankingRates.com.
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1. Choose the right financing
The right financing comes from the right lender. Scott Haymore, senior vice president and head of mortgage pricing and secondary markets for TD Bank, urged older first-time buyers to discuss their particular family and budget situation with a lender to decide whether a short-term or longer-term loan is better.
"If you plan to retain the house and live in it into retirement, when you will probably have reduced income, then a shorter-term loan may be beneficial," said Douglas Funk, a mortgage loan specialist for 15 years in State College, Pennsylvania, now with First National Bank. "However, if you are planning on selling the property to relocate or move to a retirement community, then any outstanding balance on your mortgage would be paid off with the proceeds from the sale."
2. Find a down payment
A cash down payment of 5, 10 or 20 percent of the sale price is typically required by mortgage lenders, depending on the type of mortgage. At mid-life, it can be hard to save for a down payment, particularly if you have existing debt. "The best way to come up with a down payment is good old savings, or borrowing from a 401(k) is acceptable amongst other saving plans, such as life insurance and Roth IRAs," said Yael Ishakis, vice president of First Meridian Mortgage in Brooklyn, New York.
Haymore noted that buyers who are unable to put down a significant amount might have to pay an additional $100 to $200 a month to the lender for private mortgage insurance. However, many lenders now offer assistance programs for down payments. "TD Bank offers the Right Step mortgage, which allows borrowers to put as little as 3 percent down without the added cost of PMI."
3. Consider timing for retirement
Discuss with your advisor or real estate agent whether homeownership will be an asset or a burden once you reach retirement. When you can pay off your mortgage debt paid off can determine whether you retire at age 62 or 72.
"When the borrower turns 62, they can apply for a reverse mortgage, and by doing that they can eliminate the monthly payment in entirety aside for the taxes and insurance on the property," Ishakis said, noting that a longer loan is a smart move.
4. Plan for other costs
Homes require maintenance. Factor in home improvement costs and monthly household expenses when calculating your monthly payments. Haymore noted that first-time buyers might find the costs of running a household a shock. "Utilities, homeowners' association fees, cable, interest and more can add up to a substantial monthly payment," he said.
To ensure a healthy financial situation in your 40s, Funk suggested building contributions to your 401(k) at least to the amount that your employer matches, setting up 529s to pay for college and contributing to an emergency fund. "Make it easy to save and hard to withdraw," he said. "At one point in my career, ... when my income would swing wildly from month to month and I was using a 'slush fund' to even out cash flow, I actually opened an account at another bank. I didn't have checks for that account; I didn't have an ATM card; I had to physically drive to the bank to withdraw money. I wanted to make sure it wasn't too easy to withdraw funds."
5. Find low-risk options
Currently, most predictions call for interest rates to rise. Borrowers who are unsure of the dynamics of adjustable-rate mortgages should opt for a fixed-rate mortgage. A fixed-rate mortgage guarantees a specific monthly payment, which makes managing a budget and finances easier for first-time buyers.
6. Ask for gifts
Gifts -- perhaps from parents who want to contribute to this new phase of life -- can be a source for down payments. According to Funk, PMI "is calculated at different rates based on your down payment. If you buy a house for $350,000 and can come up with a 13 percent down payment, an additional $7,000 gift would put you at a 15 percent down payment and a lower mortgage insurance rate," he said. "If I make some general assumptions about a few other variables and then calculate the insurance rates, it comes out to savings of about $500 per year."
7. Live sensibly
"Buy what you can afford, which is often less than you think," Funk said. "Don't just finance the biggest payment that you qualify for. Do you really need to go from renting 1,200 square feet to owning 3,000?"
If lifestyle has prevented you from buying until now -- perhaps you move every few years for employment, for example -- maybe homeownership isn't for you. Consider your expected tenure as the rule of thumb. If you expect to be in the house for five years or more, go for it.