Q: My mom and dad have refinanced their home with a 40-year mortgage. They are both 71 years old. Have you heard of this type mortgage? And if so, what am I in for when the day comes, assuming they do not live to the payoff of the loan term, when they will be age 111?
A: It sounds as though you’re a little surprised that a mortgage lender would offer a 40-year loan term to borrowers who are in their 70s. That’s an example of age-blind lending, which is exactly what anti-discrimination laws in this country require.
Along the same vein, a lender cannot deny a loan to an otherwise qualified borrower who is pregnant or home on maternity or paternity leave.
If the lender had denied a loan to your parents simply because of how old they are, they would have grounds for an age discrimination lawsuit.
Now let’s turn to the mortgage itself. Lenders now offer a variety of loan terms, from 10 to 40 years in length. Where a 30-year mortgage allows homebuyers to manage their monthly mortgage payments with a fixed payment, and pay off their home debt over 30-years, a 10-year mortgage requires much higher monthly payments (with far less interest paid) but pays off the loan over ten years. With a 40-year loan, you pay very little principal each month so your monthly mortgage payment is lower than with a 30-year loan, but the corollary is that the amount of interest paid over the life of the loan is far higher.
When you have a 40-year loan term, it will take your parents a long time to start significantly paying down the balance of the loan, because mortgage amortization schedules require borrowers to pay most of the interest in the early years of the loan.
If your parents took out a 40-year mortgage on their home on January 1, 2012 for $200,000 at 4 percent, it will be about 27 years before the loan balance is cut in half. With a 30-year amortization loan, it would take only 19 years to achieve the same result.
As you can see, you will likely inherit the property with a sizeable mortgage balance on it. If your parents live to be 90, and they started out with a loan balance of $200,000, the loan balance in 19 years will be around $178,000.
What are your options? Hopefully, the property is worth far more in 20 years than it is today, so there will be a comfortable amount of equity in the property. You could sell the property and pay off the loan or the lender will allow you to continue to make the payments and will put the mortgage in your name, as the individual who inherits the property.
It’s likely that in 20 years, whatever interest rate your parents get on this loan will seem cheap by whatever is being offered at the time. You may decide to rent out the property and continue paying the mortgage, or you may decide to live there. Either way, be sure your parents continue to make their property tax and insurance payments as well, so their ownership is protected.