By Dana DratchBANKRATE.COM
NORTH PALM BEACH, Fla. — Get cold sweats just contemplating 30 straight years of mortgage payments? You ain't seen nothing yet.
Home buyers shopping for a loan might 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.
"It's hard for some people to conceive this is happening," says John Marcell, immediate past president of the California Association of Mortgage Brokers. "But it makes a lot of sense. You'll be able to buy a more expensive home than you could qualify for otherwise."
But some consumer advocates and financial professionals worry that buyers who need to stretch payments over 20 more years are coveting too much house.
"It's definitely a bad idea," says Dave Ramsey, author of "The Total Money Makeover," and host of a nationally syndicated radio show on finances. "The family is still not building net worth," he says. "It's still just keeping the family in debt."
Alex Diaz Jr., vice president of Statewide Bancorp Inc. of Rancho Cucamonga, Calif., says the 50-year plan is better for the borrower than an interest-only or payment-option adjustable-rate mortgage. In an interest-only mortgage, the minimum monthly payment means zero is being applied to the outstanding balance.
A payment-option ARM can be worse — sometimes the minimum monthly payment doesn't 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.
But Allen Fishbein, director of housing and credit policy for the Consumer Federation of America, disagrees. "Some might say it's more akin to leasing than buying," he says, because the percentage of the payment applied to principal is very low. It's not the product for someone who wants a home for traditional reasons, such as creating a nest egg, he says.
Currently, you're not likely to find 50-year home loans at your bank or credit union. Most of the loans are coming from mortgage brokers, says Marcell. "We're starting to see several of the wholesale companies offering that now," he says.
And while they can fit certain buyers in special circumstances, "I don't think the average consumer will benefit from a 50-year mortgage, because of all the interest over the long term," says George Hanzimanolis, president-elect of the National Association of Mortgage Brokers.
Rates for 50-year mortgages tend to be about 25 to 50 basis points higher than the rates on 30-year fixed-rate mortgages, Marcell says. A basis point is one-hundredth of a percent.
Critics contend that, for all practical purposes, a 50-year mortgage isn't much different from an interest-only loan.
"It's basically another way of saying 'an interest-only mortgage,' " says Ramsey. "You're going to be stuck forever in that thing — it's quicksand."
While the monthly payment is lower, you'll also pay more interest.
The monthly payment — not including taxes and insurance — would be $148 lower with the 50-year mortgage, but the entire $148 saved would be taken away from principal. Over the course of the 30-year mortgage the total interest paid would be $231,676, but with the 50-year loan the total interest would be a whopping $431,685 — $200,000 more. Over the 20-year difference in the loans, that would mean paying an average of $10,000 more per year in interest to get monthly payments lowered by $148, or $1,776 a year.
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, 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, says Diaz, the institution's executive vice president.
Borrowers are likely to "be looking for a short-term solution, knowing they want to be using this as a starter home," says Diaz.
"In a state like California, we're having housing become more and more unaffordable," he says, so borrowers are looking at longer mortgages — and smaller payments — to help them get into the market.
Proponents of the product warn that it's not for everyone. "It doesn't fit everyone's bill," says Marcell.
Buyers who consider these products should "step back from the buyer's frenzy," he says. "Ask yourself: Does it make sense? What are the pros and cons? What's the best thing that could happen to me? What's the worst thing?"
Because you pay so little toward the principal, it's not a good choice for someone who might want to move within a few years. "I like to think these people are going to stay with that particular product for at least five years," says Marcell.
A buyer should be anticipating some sort of increase in income, he says.
But when that money comes, "Go ahead and pay more money against it," says Hanzimanolis. At that point, the smart buyer starts making payments equivalent to a 30-year or 15-year note. But, similar to handling credit cards, many consumers mean well but don't follow through.
Some loans also carry prepayment penalties through the first few years of the note. Since you're 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, refinancing will probably be a lot like simply buying the same house all over again.
Remember, the length of the 50-year loan also means it takes many more years before meaningful equity buildup kicks in. With almost any conventional mortgage, you pay more interest and less principal during the earliest years of the loan. Because you're paying significantly less principal each year than with a 15-year or 30-year mortgage, you really don't want to use it for a property that you're going to keep less than five to 10 years, says Ron Phipps, broker with Phipps Realty in Warwick, R.I.
With a 50-year loan, you can't count on pulling out a chunk of equity when you go to the closing table to refinance, which means you may have to come up with closing fees and other costs out of your own pocket.
Prime candidates for 50-year mortgages would be professionals who don't have the current income to qualify for their dream homes but are anticipating significant increases in their earnings. A longer term, where buyers are paying mostly interest, allows them to get the house now.
In many cases, that goes against conventional financial wisdom, which holds that counting on — and living off — future earnings is often a bad idea.
"It's a very dangerous situation," Ramsey says.
February 11, 2007
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