Retirement plans and paying off the mortgage have traditionally gone hand-in-hand as people approaching retirement anticipate eliminating a payment that typically claims the largest single chunk out of the monthly budget.
That idea isn't dead, but it has taken a little adjustment as boomers approach retirement in economically tough times. The good news is many are able to pay off their mortgages more quickly as expenses for raising children are gone, discretionary income has risen and rates are at record lows. However, members nearing retirement saw their stock portfolios shrivel, leaving them with fewer liquid assets to rely on when they wave goodbye to their co-workers.
Enter the short-term mortgage. By putting a few hundred dollars more into a house payment for five or ten years, people approaching retirement can still look forward to waving goodbye to mortgage payments.
One key to this idea is that interest rates remain low. For example, at CitizensFirst Credit Union in Oshkosh, Wis., a five-year mortgage is available for 2.74 APR. Stretch that out to 10 years, and the APR is still an attractive 2.99.
The credit union is working to alert members to what a big part of their budgets mortgage payments represent.
Ken Bucksnes, mortgage manager at the $366 million credit union, notes CitizensFirst has always offered a 10-year fixed-rate mortgage. When interest rates really started dropping, there was a lot of interest in the 15-year fixed rate product.
One factor attracted the credit union's attention when it analyzed the records of borrowers with 10-year fixed-rate mortgages. They found the loan quality was extremely high. Today, CitizensFirst has almost 300 short-term mortgages on the books, over 25% of the credit union's first mortgage loans. The average credit score is 777. The average loan-to-value is below 55%.
"About a year ago, we came up with 'Retire Your Mortgage,'" he explains. "What we did is kind of morphed our 10-year program into what we call "Pick Your Term." Members can select a schedule that coincides with when they want to retire and have their mortgage paid off. They can select anywhere from a five-year fixed-rate to a 12-year fixed-rate mortgage."
For every year less than 10 years, CitizensFirst shaves 5 basis points off the interest rate. For every year over 10, up to12 years, five basis points are added.
"So if they decide to take an eight-year fixed-rate mortgage they would pay 2.75%," Bucksnes said.
The credit union sells its 15-, 20- and 30-year fixed-rate mortgages to Fannie Mae.
"We wanted to be very cognizant of what was going to happen to our interest rate risk. So we looked at the shorter-term fixed rate as something where we'd be able to offer an attractive rate. Because the balance is amortized over a shorter term, it alleviates some of the interest rate risk we would carry if we were to offer a 15-, 20- or 30-year program," Bucksnes noted.
"We're expecting, of course, that rates are going to go up. Take a seven-year or even a 10-year fixed-rate mortgage. When you look at where that balance is three, five or six years down the road, because the balance has dropped so aggressively, we don't carry that interest rate risk."
Bucksnes believes the credit union is in a unique environment right now. With interest rates so low, borrowers find their payments on a short-term product less than they had anticipated. Once rates start rising, it may be a little more difficult for someone to look at a fixed-rate short-term mortgage and find the payments will be comfortable.
Community Credit Union in Rockledge, Fla., is also offering short-term mortgages aimed at members looking at retirement. The $407 million credit union's website cites some of the specifics: maximum loan to value 70%; existing mortgages only, no new purchases; owner-occupied property only; new loans only, not existing Community CU mortgages; excludes manufactured homes; property and flood insurance may be required; closing costs are $500.
Laurie Cappelli, senior vice president, said the credit union has always offered a flexible loan structure, anywhere from 10 to 40 years. In fact, CCU will write mortgages for as short a term as five years. Typically, she said, short-term mortgages do appeal to older boomers getting their retirement plans in order. Currently, the credit union is launching a marketing campaign to keep members aware of the product. The campaign will feature a 10-year, no closing cost option. Cappelli indicated the product has been easy to administer, and 70% loan-to-value is typical.
"Looking at our portfolio right now, it appears about 17% is 15 years and 3% is 10 years," she said. Each month the credit union holds employee meetings to reviewed products. The mortgages don't require a lot of training, primarily keeping staff abreast of rates.
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