Boomers Are Comfortable With Financing Last Homes
By Jack L. Haynes, Countrywide Home Loans
Our parents have taught us many lessons over the years, but one that may not stick involves how to buy our last home.
With past generations, most older buyers cashed out the equity from the family home and bought something smaller with the proceeds. If they actually did take out a mortgage, they plopped down a substantial cash downpayment to make their monthly payments less than a monthly apartment rental.
It’s not surprising that the first wave of 50+ boomer home buyers has abandoned this approach. They have rewritten the rules of consumer behavior at every life stage and they are doing it once again.
While there are no hard statistics yet — we’re only in the initial years of this generation’s long march toward retirement — day-to-day reconnaissance has shown that this group is all over the board in terms of financing. Boomers, who are not known for their frugality, are far more comfortable with financing and are sophisticated enough to understand what it can do for them.
Boomers Aren’t Downsizing the Way Their Parents Did
One practical reason is concern about the unknown. With Social Security possibly changing and health care costs continuing to soar, boomers are telling us that they would rather hold onto their cash. Additionally, they want the means to help their children or grandchildren attend college or finance their first homes.
A second reason is lifestyle — members of the “me” generation see no reason to deny themselves at this life stage. These buyers aren’t downsizing the same way their parents did. For some, a new home represents the culmination of a lifetime of success, and they want to live in a home with all of the bells and whistles.
Others want their home to be the center of family life, with ample room for boomerang children, visiting grandchildren or elderly parents who might need care. Or, they may anticipate a time when a live-in caretaker will be necessary as they age in place. In fact, a new home may require financing since it may not be smaller and could include more options and upgrades.
Finally, boomers have ridden all sorts of real estate and economic cycles over their lifetime and have become very sophisticated consumers of financing. Unlike their parents, they’re not afraid of debt, particularly when mortgage rates continue at historic lows. Nor are they intimidated by finance.
A significant addendum is that many boomers may not even retire for years to come. While they may leave a longtime job, they might trade it in for independent consulting work or the pursuit of some other passion. And, this generation of consumers stands to inherit more from their predecessors than any other generation.
Boomers Have Impressive Equity in Their Current Homes
In addition, these buyers have impressive equity in their current homes, leading some to believe boomers will have more cash to buy a house and that the vast majority will be putting down large cash amounts to make the purchase.
However, this trend is not as prevalent as you might expect. So far, these buyers are pursuing mortgages of all types.
Boomers Expect and Demand Financing Choices
As sophisticated consumers, boomers expect and demand choices. They don’t want to be limited to a targeted product like reverse mortgages, which may be premature for them at this point of their lives.
Savvy financial institutions interested in serving these customers are now doing a lot of research and development, looking at the demand and trying to understand how to meet it through a variety of new programs. Along the way, we’re finding that boomers prefer programs with options that target their changing financial and personal needs. For example, payment option loans, which weren’t developed with boomers in mind, have become highly popular.
Payment option loans initially were geared toward consumers with variable incomes (i.e., sales people on full commission). As it turns out, the flexibility also appeals to older customers since they may have investments that kick in at certain times of the year, or they are waiting for Social Security payments to begin. The product essentially is an adjustable rate mortgage that offers several monthly payment choices.
What Boomers Can Pay
Depending on the customer’s financial situation that month, the customer can pay the following:
- The minimum payment that adjusts annually based on an index chosen by the borrower (subject to recast every five years, or sooner, if negative amortization limits are reached)
- An interest-only amount
- The full principal and interest to amortize in 30 years
- The full principal and interest to amortize in 15 years
- Any amount over the minimum (making a minimum payment may not pay all the interest due on the loan and may result in negative amortization)
Lenders will continue to develop a wide range of flexible products that boomers can use to maximize their purchasing power while still retaining cash.
Because understanding the types of financing this age group prefers is so vital, lenders make good strategic partners with home builders interested in attracting boomer home buyers. This is particularly true for geographic markets that previously did not have much 50+ activity.
As more boomers choose to buy homes in cities where they’ve reared their families and where children and grandchildren live, home builders will need more information about what these buyers want. Full-service lenders can help builders meet the unique needs of the boomer market.
Jack L. Haynes is executive vice president of Countrywide Home Loans’ National Builder Division based in Plano, Texas. His responsibilities include managing the business unit, which serves the financing needs of home builders and their customers. In 2004, Countrywide funded more than $14 billion of mortgage loans with customers purchasing new homes from home builders nationwide. Haynes has more than 25 years of mortgage industry experience and has held executive positions in the national builder business units of Weyerhaeuser Mortgage and GMAC Mortgage. For more information, e-mail Haynes, or call him at 800-262-4214.
The article appeared in the Fall 2005 issue of Seniors’ Housing News (soon to be 50+ Housing Magazine), the official quarterly magazine of the NAHB 50+ Housing Council.