Can you imagine taking on a debt that will take you 50 years to pay off? That’s half a lifetime.
Yet, a few banks and mortgage companies are offering 40 to 50-year loan products for the purchase of a home.
The attraction is that you can buy more ome for a lower monthly payment. The disadvantage is that with the added years comes hundreds of thousands in interest payments.
"A big part of selecting a 50-year mortgage is the payment size," said Larisa Meyer, a new home buyer. "I also know that in a few years, I will have some equity. It won’t be a ton, but there will be some."
Most experts are warning consumers that longer-term mortgages do not come with the fixed-interest rates like 30-year mortgages.
For example, a 50-year mortgage may have a fixed interest rate of 6.5% for the first five years, after which the rate adjusts annually. Many will also require a "balloon payment" after the first 30-years, which makes it really a 30-year mortgage with the payments of a 50-year.
Lenders say that most mortgage holders will refinance or sell long before the 30-year balloon payment. Many will before the interest hits the adjustment period. Most Americans only own their homes for seven years.
"I haven’t talked to a client yet who intends to hold a mortgage for 50 years," Pirius said. "But that low payment helps people qualify. It gets them into that home and getting the tax benefits of ownership."
The payment on a $250,000 mortgage at 6.5% interest for 30-years is around $1,580 a month. A 50-year at the same rate has a payment of approximately $1,410. That’s a savings of $170 a month.
One of the major drawbacks of long-term mortgages is, according to Keith T. Gumbinger of HSH Associates, the slow building of equity. He said that when compared to interest-only loans, there’s very little difference.
Gumbinger calculated that on a $275,000 mortgage for 30 years at 6.75%, a consumer would pay $367,112 in interest over the life of the mortgage. The same mortgage at 7% and a 40-year term would result in $535,290 of interest. At 7.25% for 50 years, the interest totals $749,476. There is less than $100 difference in the monthly payment amounts between the three mortgages.
"You really can’t think of these as long-term financing vehicles because the interest cost is overwhelming," explained Gumbinger.
Experts agree that many lenders are simply looking for a way to stand out in a stagnanting market place. With interest rates on the rise and the housing market cooling off, many lenders are looking for a way to compete.
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