"50-Year Mortgage Right For You?" 

Homeowners shopping for a home loan may notice a new mortgage program. Announcing the new 50-year mortgage.  Some may think that a 50-year mortgage loan is better for borrowers than an interest-only or payment-option ARM.  If you have an interest only loan and just pay the interest, you are not applying any money towards the outstanding balance.  An option ARM maybe even worse if you choose the minimum monthly payment. Your outstanding balance increases every month as the unpaid interest gets added to the mortgage amount.

A 50-year loan is certainly not the product of choice for someone who understands the benefits of real estate, such as building wealth and securing his/her retirement.  The average consumer will not benefit from a 50-year mortgage, because of all the interests over the long term.  Rates on 50-year mortgages tend to be higher than the rates on 30-year fixed-rate mortgages, as for interest only and payment option ARM loans since they represent more risks to the lenders.

While the monthly payment is lower, and the interest rate higher, you will also pay way more interests in the long run.
 

The monthly savings on a 50-year mortgage is just $273.40.  You can see on the table above, you apply very little towards the principal when you select a 50-year mortgage.  Over the life of a 30-year mortgage the total interests paid would be $510,177.95, but with the 50-year loan the total interests would be a whopping $952,920.52 or $442,742.57 more, which is the costs of the home mortgage on the above example. On a 50-year loan you'd be paying almost $1,000,000.00 in interests to the lender.

Of course, when you figure in the fact that the 50-year mortgage realistically will cost you 0.5 percent more in interest, whatever benefit you might see with the 50-year mortgage all but disappears: The monthly payment of $2,406.75 would save you $121.52 per month, and the total interest would rise to $1,044,052.30. The monthly saving is too insignificant and does not justify all the additional interests you pay to make the lender wealthy.

Some programs offer a fixed-rate for 50 years, others offer options that include a fixed rate for the first three or five years, then switch to an adjustable rate.  Still, other versions amortize the principal over 50 years but require a balloon payment after 30 years, for the balance of the loan.

In a state like California, where housing become more and more unaffordable, some borrowers are looking at longer mortgages and smaller payments to help them get into the market.

Who benefits?

Buyers who consider these products should find out about the pros and cons.

Because you pay so little toward the principal, it's not a very good choice for someone who might want to move within a few years.  These borrowers who choose a 50-year loan should stay with that particular product for at least five to seven years to build some equity.

Some loan programs also carry prepayment penalties through the first few years of the loan.  Since you're already not building much equity, this can make it more expensive to refinance in the early years of the loan.  Also with little equity built up, it may be more difficult to refinance. The lower the equity, the higher the rate since the loan represents a higher risk to lenders.

Assuming no down payment and no increase in property value, a 30-year loan on a $400,000.00 home will leave you with $27,248.13 in equity in five years and about $64,563.22 in 10 years. Whereas a 50-year mortgage, will leave you with about $5,152.91 in equity in five years and about $12,561.28 in 10 years.  And relying on appreciation to boost your stake in your home is certainly not a sure thing, as evidenced by the marked slowdown in home values.

So with a 50-year loan, you can't count on taking cash out when you want to refinance, which means you may have to come up with closing fees and other costs out of your own pocket.

So what is your best option when a lender or mortgage broker suggests you a 50-year loan because you can only afford a certain monthly payment?

The answer is simpler than you think. JUST BUY A CHEAPER HOME.

BUY THE HOME YOU CAN AFFORD. You need to resist the temptation of buying that beautiful home you've be dreaming about.  Start with a more affordable home, build equity, then buy the home of your dream.

Let's take the example of someone who buys a $300,000.00 home instead of $400,000.00, because he cannot afford to pay more than $,2000.00 per month. We'll assume the rate is 6%. In that example the borrower will add $150 in additional monthly payment towards principal.  The monthly payment will be $1,798.65 + $150 = $1,948.65.  After 5 years the loan balance will be $269,898.88, thus there will be $30,101.12 equity in the home.  In which case you can apply this amount as a deposit towards a $400,000 home.

Your new mortgage will be $370,000.00. We'll assume that the interest rate stays the same.  The new monthly payment on a $370,000.00 loan will be $2,218.34, thus $269.69 more.  That is the road everybody should take.  Instead of buying something you cannot afford and build no equity, you should purchase something you can afford, build equity, then buy something bigger using the equity you've built up in your previous home.

Don't let professionals persuade you to buy a bigger home with a bigger mortgage.  They will make a bigger commission on the sale of the house.  Lenders will make way more money collecting interests payment.  You will be the loser of the transaction.  Be smart, and remember that real estate is all about building wealth for your family.

To Your Success,

It's All About You!