Fifty Year Mortgage

Posted by  on Apr 16, 2009
Homebuyers shopping for a loan may notice a new kid on the block: the 50-year mortgage. Some mortgage lenders see the idea as an alternative to "interest only" loans and a tool to shrink those monthly obligations, especially in high-ticket areas such as California. However, some consumer advocates and financial professionals worry that buyers who need to stretch payments over twenty more years are coveting too much house. A payment-option ARM can be a bad idea because sometimes the minimum monthly payment does not even cover the interest accrued that month.

You could make a minimum payment one month and find the next month that the outstanding balance grew. While the 50-year fully amortized mortgage certainly means a slower rate of repaying the balance, at least the balance is being reduced, not remaining stagnant or increasing. It is probably not the product for someone who wants a home for more traditional reasons, such as creating a nest egg, he says. Currently, you are not likely to find 50-year home loans at your bank or credit union. Most of the loans are coming from mortgage brokers.

In addition, while they can fit certain buyers in special circumstances. Rates for 50-year mortgages tend to be about 25 to 50 basis points higher than the rates on 30-year fixed-rate mortgages. A basis point is one-hundredth of a percent.
Critics contend that, for all practical purposes, a 50-year mortgage is not much different from an interest-only loan. While the monthly payment is lower, you will also pay more interest.

Remember that not all 50-year loans are the same. While some loans offer a fixed-rate for 50 years, others offer options that include a fixed rate for the first three or five years, and 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.

California-based Statewide Bancorp started offering 50-year loans last year, with fixed-rate, as well as ARM, versions. Both types run for 50 years with no balloon payments required. So far, more than 1,000 borrowers have opted for the mortgages. Proponents of the product warn that it is not for everyone.
Buyers, who consider these products should, step back from the buyer's frenzy. Ask yourself: Does it make sense? What are the pros and cons? What is the best thing that could happen to me? What is the worst thing?

Because you pay so little toward the principal, it is not a good choice for someone who might want to move within a few years.
A buyer should also be anticipating some sort of increase in income. However, when that money comes, go ahead and pay more money against it. At that point, the smart buyer starts making payments equivalent to a 30-year or 15-year note. However, similar to handling credit cards, many consumers mean well but do not follow through.

Some loans also carry prepayment penalties through the first few years of the note. Since you are already not building much equity, this can make it more expensive to refinance in the early years of the loan.

Since buyers often look at a 50-year loan as a temporary solution, refinancing or resale before the home is paid off is a virtual certainty. Weigh that going into the deal, too. Analyze how a shortage of equity could affect refinancing. Unless you pay extra money toward the equity or see a dramatic increase in the value of your house, your refinance will probably be a lot more like simply buying the same house all over again.


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