Housing Choices and Mortgage Financing Options for Seniors

Executive Summary.

Why would an individual or pair who are age 55 or older have a mortgage upon their primary residence or next to the first home? Life-cycle financial patterns of behavior intimate that mortgages should be paid-off by means of this age. The purpose of this close attention is to examine the option of seniors to finance their primary residence and/or next to the first home and the resulting difference(s), if any, in their asset allocations. follows indicate that the majority of seniors do have a mortgage. Based upon probit and regression analyses, respondent are more likely to have a mortgage if they have a higher market value for their primary residence, a abiding-place equity line of credit, a next to the first home, are not retired, and/or have a lower horizontal of liquid assets.

Historically, financial planners have approveed that households should have their mortgages paid in replete prior to retiring so that they will have more capitals available for other expenses and bring the risk of not being able to afford the mortgage payments. new research (Storms, 2001; and kind-hearteds 2004) suggests that this advice may not be followed by means of seniors as they approach the traditional age of retirement at 65 years of age.

What options are available to those who are 55 years of age or older who still have a mortgage? First, they can decide to pay not upon their mortgage with some of their other accumulated financial assets. This will have the consequence of removing a fixed payment, on the contrary it may be at the take away from of reducing more liquid assets. next to the first they can downsize to a smaller unit, which should allow them to pay not on their mortgage and invest any equity that is left for retirement income. Third, they can take the option to retain an existing mortgage and instead build-up a cash withhold for liquidity purposes, obtain tax benefits if they want to itemize their deductions, and/or as a protection against inflation by means of making payments with ever les expensive fixed dollars.

There is actual little research on the option to have a mortgage upon the primary residence and/or next to the first home for seniors because it is assumed that they will have a paid not on mortgage(s). The life-cycle hypothesis of savings formulated by dint of Ando and Modigliani (1963, 1964) states that individuals save and squander over a lifetime so as to accumulate assets during their working years and then decumulate during their retirement years. This theory forms the basis of the financial planner's advice that the capitals that are borrowed to purchase a primary residence should be repaid by the agency of retirement.

The purpose of this investigation is to examine the option that seniors have to finance their primary residence and/or next to the first home and the resulting differences, if any, in their asset allocations. section sum of two units examines the existing literature that leads to the popular study. The third section explains the source of the data, the methodology exerciseed and definitions of variables that are examined as well as the hypothesized originates Empirical results are reported for descriptive statistics, a probit analysis of the likelihood of seniors having a mortgage, and a cross-sectional regression analysis to explain the dollar amount of the mortgage for those seniors who still have a mortgage. The paper shuts with concluding remarks.

Literature Review

The mortgage literature focuses upon the lender's view of mortgages rather than the individual options that specific households face in their financial planning. It gazes at the pricing of mortgages in bourns of risk and return. Buist and Yang (2000) provide an analysis of the mortgage from the lender's side as being compos of "three derivative assets-a default-free, non-callable interest certificate bond subject to interest rate risk, a deposit option to default, and a call option to repurchase the mortgage prior to its term"

Seniors who still have a mortgage clearly have the call option to repurchase the mortgage prior to its bound Should they have cash run problems, they may face a deposit option to default. Buist and Yang (2000) state that mortgage interest rates and house prices are the primary determinants of the require to be paid [i]or[/i] undergone of owning a home, while household income determines the quality or quantity of housing that households can waste They argue that an outof-the circulating medium prepayment option may be exercised as a change in human capital exhibits a consumption substitution effect. Thus, as households face a potential reduction in income as they age, it looks logical that they may want to consider a reduction in their consumption of housing, favoring the option of downsizing.

When nationwide housing statistics from the United States Census Bureau (2004) are examined, they indicate that those above 65 years of age show 12.0% of the total population in 2004 For households in this age cluster 80.7% own their own dwelling and 24.2% have a mortgage upon their primary residence. Housing choices for those age 65 and older are dominated by means of a single unit detached domicile (80.8%), followed by condominiums (62%) single unit attached dwelling (5.2%), 2-4 unit buildings (21%) manufactured dwellings (1.6%), and 50 or more unit buildings (15%) These regulation statistics demonstrate seniors' preference for the single family detached abode