How About Spreading Mortgage Payments Over 50 Years?

How About Spreading Mortgage Payments Over 50 Years?

A Loan That Can Last
Five Decades

Think a 50-year mortgage is highly unlikely? Think again. Banks in California and other parts of the country where home prices are relatively high are offering 50-year loans, developed to meet the needs of cash-strapped homebuyers.

Even though housing prices have declined recently, many Californians still are not able to afford to buy a home. The 50-year mortgage offers an additional option for these would-be purchasers.

While the monthly payments on this mortgage are low compared to shorter-term mortgages, there are two other major issues to consider.

First, a 50-year mortgage builds equity very slowly. If you were anticipating using your home as a revenue stream to finance your children’s education or home improvements, the money probably won’t be available when you need it.

The second factor to consider is that the 50-year loan is a hybrid, which combines fixed and adjustable rates. This provides lower monthly payments, at least during the initial years of the mortgage when the rate is fixed. However, at the end of that honeymoon period, it becomes an adjustable rate mortgage, and your monthly payments could rise, perhaps significantly over the life of the loan. What looks like a good deal now, could become troublesome as time goes on.
How Does a 50-Year Mortgage Compare to Other Loans for Cash-Strapped Buyers?

Fifty-year mortgages are similar to interest-only loans. The difference is you reduce some of the mortgage balance each month. Therefore, they aren’t considered as risky as interest-only mortgages, which sometimes allows borrowers to pay even less than the interest each month. In these cases, borrowers might not build any equity at all. They could end up owing more than a home is worth, which is sometimes called negative amortization or “going negative.”

Mortgage experts generally advise consumers that a 50-year mortgage works best for those who plan to stay in their homes for about five years, while the loan’s interest rate remains fixed. After that, borrowers are playing a game with their payments because interest rates are uncertain.

However, if you really need a longer term than the typical 30-year mortgages being offered, you might consider a 40-year mortgage. These fixed-rate mortgages were developed by several California savings and loan associations in the late 1980s, and have become popular with consumers across the country. Lenders are increasingly offering this mortgage product because they are now able to sell certain 40-year fixed-rate loans to Fannie Mae, the nation’s largest mortgage finance company.

The 40-year fixed-rate mortgage is a better alternative than interest-only loans because borrowers eventually build equity in their homes, although it is a gradual process. Another advantage is that borrowers are not subject to rising interest rates.

Before you decide on an extended mortgage, either 40 or 50 years, talk over your options with your real estate agent or trusted financial adviser. Homeownership may be the American Dream, but you want to make sure you choose the mortgage that is right for you.

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