The median age for first time homebuyers has been climbing steadily for decades. In 1990, the average age of the first time homebuyer was 28. By 2020, it was 33. At the time of this writing, it is 40.
Despite this reality, a lot of people who are shopping for their first home today still may think of homeownership as something that usually happens at a younger age. Those in an older range may be surprised to learn their situation is now typical.
You may be wondering how the current average first time homebuyer age impacts the home purchase process and decisions made about mortgages. Let’s take a look.
- Age is not a factor when assessing borrowers. Homebuyers will be pleased to learn that thanks to the Equal Credit Opportunity Act (ECOA), it is illegal for mortgage companies to discriminate on the basis of age. So, whether one is applying at 20, 30, 40, 50 or beyond does not on its own impact approval or rates. Your age may be tied to the context of where you are in your life financially and with respect to employment, however. Lenders will consider your credit score, your debt-to-income (DTI) ratio, your employment status, and your employment history.
- Loan term decisions are important. Loan terms generally range between 15 years and 30 years.
- A 40-year-old buyer would not finish paying off a 30-year loan until age 70.
- A 40-year-old buyer would finish paying off a 15-year loan by age 55.
If you can afford a shorter loan term, it can be a relief to pay off your mortgage before hitting what would typically be considered retirement age. You also can benefit from a lower interest rate. Many people who are buying their first home when they are around the current average age are not in that scenario by choice. They were unable to afford to buy a starter home when they were younger, and only now are finally able to do so. With sufficient income, a shorter loan term may be manageable. But if that would result in too much financial strain every month, a longer loan term may be necessary. In some cases, this could also be a scenario where retirement is delayed.
- Retirement funds may available to use. Speaking of retirement, even a homebuyer who fell behind during the early part of their life may sometimes still have significant retirement savings by the time they are finally ready to buy a home.
If that describes you, you are probably wondering if it is possible to dip into them to help you with your down payment.
- 401(k): Theoretically, you can withdraw early from a 401(k). But you are not going to want to, because it comes with a 10% federal penalty. You can, however, take out a 401(k) loan, where you borrow from your balance. There’s interest, but you don’t have to deal with a penalty for early withdrawal. Just be aware that if you switch companies, the full loan can come due.
- Roth IRA: You are allowed to withdraw any time from your Roth IRA account. What you may withdraw without penalties is limited to your contributions, and does not include your earnings. Check the rules for earnings if you want to withdraw any. Try to stick with just withdrawing contributions if you can.
- Cash: Perhaps you have a lot of your money in a high yield savings account, maybe enough to cover your down payment. If so, that makes for a great option.
Speaking of all of this, one more consideration involving investments, retirement, and loan terms is how your mortgage will impact retirement plans. - With a longer loan term, you may be able to put more money into retirement accounts each month. But you will pay more interest over the lifetime of your loan, both because your interest rate may be higher, and you will be paying interest for longer.
- With a shorter loan term, you may not be able to put as much money into retirement accounts each month. But you will pay less interest over the lifetime of the mortgage.
How do you know which option is better? The only way to figure it out is to do some calculations. Some guesswork will be involved, since you cannot be certain what rate of return you will get on your home investment or investments in other assets. But you can try your best to make an educated guess.
Buy Your First Home in California
At Granite West Funding, we can help you buy your first home in Oakhurst or anywhere in California, no matter your age. To get started, please give us a call at (559) 540-2275 to schedule your mortgage consultation.
