How mortgage needs change over a lifetime

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People of different generations tend to be best served by specific types of mortgages.

While any home loan might be the right choice for any age, a homeowner’s mortgage needs tend to change over a lifetime. Here’s a look at which loans appeal most to people who are just starting out, approaching or hitting middle age, getting ready to retire or moving beyond their career days.

First home loan

Many of today’s young people are well-positioned to buy their first home, says Jim Pomposelli, a mortgage banker at The Federal Savings Bank in Chicago.

“We’re dealing with a generation that’s much more responsible,” he says. “These are people who have great credit and solid, stable income. They just don’t have the down payment, and they have student loan debt, which is a huge burden.”

Often, the solution to the down payment problem is “generational wealth” that’s moving from grandparents and parents to younger people, Pomposelli says.

Two types of mortgages are likely to meet the needs of buyers of a younger age, according to Rob McAllister, owner and mortgage broker at West Seattle Mortgage in Seattle. One is a low down payment conventional mortgage. The other is a mortgage insured by a government agency.

A conventional mortgage with a 5 percent down payment offers “the best option in terms of interest rate and mortgage insurance,” McAllister explains, while a loan insured by the Federal Housing Administration meets the needs of borrowers who have a lower credit score or are getting all of the down payment as a gift.

For those who can qualify, a VA loan, guaranteed by the U.S. Department of Veterans Affairs, is even better.

“VA offers zero down, no mortgage insurance and very, very good interest rates,” McAllister says. “It’s still solid gold for a first-time buyer.”

Around the middle: Experienced homeowners

Homeowners in their 30s and 40s tend to seek out mortgage products depending on whether they have equity at their age, or owe more than their home is worth.

Those who aren’t underwater and want to move to a different house or refinance can consider a two-loan package, Pomposelli suggests.

“A low 4 percent range first mortgage and a home equity line of credit is attractive financing for somebody who’s more established,” he says. “These people have assets. They can handle the debt. It’s more attractive to them.”

Those who are underwater can consider the latest incarnation of the federal government’s Home Affordable Refinance Program, known as HARP 2.0. This plan, which has no cap on the borrower’s loan-to-value ratio, or LTV, meets the needs of homeowners who want to refinance and lock in a low interest rate, McAllister says.

“That’s been a good fix for first-time buyers who bought in 2006, 2007 and 2008,” he says. “There are 150 percent LTV loans that are going through.”

Retirement age

Homeowners in their late 50s to late 60s are refinancing into 15-year mortgages and dumping the savings achieved by a lower payment into their retirement accounts. This strategy is so popular that McAllister says he feels like he’s closed more 15-year mortgages in the last 18 months than he did in the previous 10 years.

Some borrowers at that age opt for a fixed interest rate in the 3 percent range while others change to an adjustable rate that starts as low as 2.25 percent. The adjustable is risky, but can be a smart pick for people who plan to sell before the rate resets, McAllister says.

Another hot ticket for homeowners of retirement age is a new or refinanced mortgage that generates cash for a child’s or grandchild’s first-home down payment, according to Scott Lanoff, president of American Success Mortgage in Briarcliff Manor, N.Y.

“A lot of seniors own their home free and clear,” Lanoff says. “The homes are worth less than they ought or should have been, but they still have equity and that’s powerful.”

Older folks also are using their retirement income, whether it’s from Social Security, a corporate or government pension or both, to purchase homes for themselves. Pomposelli cites one fellow who’s living on a fixed income and recently bought a fixer-upper house.

“He’s retired, and he’s getting a single-family home that he wants to repair and live in,” Pomposelli says. “He’s looking to have something to do.”

Another option for seniors is a reverse mortgage, which taps equity to generate a lump sum or a stream of monthly payments. Brokers who offer this type of loan do so with reservations, saying it’s best viewed as a last resort due to the high cost and other disadvantages.

“It’s not something I particularly like because you have to strip equity from the property to do what you’re trying to do,” Lanoff says, “but for some people, it’s in the only game in town.”