CNN Money.com reported recently that you can now acquire 50-year mortgages! I can understand the market is becoming very competitive as the number of new mortgages is dropping, however I find it difficult to believe that lenders are offering 50-year mortgages. Assuming you acquire a mortgage at 25 years of age, that means you will be done paying your mortgage at 75 years of age, well past the average retirement age!
On top of this, assuming I understand correctly, these mortgage are adjustable. I personally like long term fixed rate mortgages because with today’s historical low interest rates, it’s to your advantage to lock in the rate (for example I locked in my personal home at a fixed rate of 5.4% for 25 years). The only benefit I can see from these 50-year mortgages is that your monthly payment will be much lower because of the term of the mortgage.
Without the protection of fixed rates, all you’re doing is giving people who normally couldn’t afford a house (for example many people in California) the opportunity to do so, but with even more risk than before. These are people that maybe even subprime lenders won’t consider that can now afford their monthly payments because of the length of the term. This just means that as interest rates continue to climb, they will affected to an even greater degree than normal lenders!
Let’s take a quick look at the numbers, you might be very surprised. I know I was!
|Interest Rate||Term (Years)||Monthly Payments|
Looking these numbers (I chose 25 years rather than the standard 30 year because of my own personal interests, but I’m sure the numbers are very similar), we can see that if the interest climbs from 5% to 7%, the 25-year mortgage increases the payments by $610.95. Now, taking the 50-year mortgage, if we increase the interest rate from 5% to 7%, the payment goes up $737.75, a much larger amount. Looking at percentages, the 25-year mortgage increases the payments by 21% whereas the 50-year mortgage increases the payments by 32%. Assuming that the people acquiring 50-year mortgages are doing it because this is the only way they can finance their properties, then the increases in interest rates are going to be much much more troubling much quicker!