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50-Year Mortgages Increases Risk

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
5% 25 $2,922.95
7% 25 $3,533.90
5% 50 $2,270.69
7% 50 $3,008.44

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!

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  •     Raven
    · June 2nd, 2006  · 12:26 pm  · Permalink

    Thank You for this information. I am a 28 year old single mother with a graduate degree and cannot afford the payment of a decent home in Riversde, CA. Everyone is offering 40, 50, interest only, and graduated mortgages. Im so confused but I know that I can not pay more than $1500 per month. that that leaves me i a shack. I did’nt go to college to live in a shack! please offer any advice. poor social worker.

  •     Steph
    · June 5th, 2006  · 12:40 am  · Permalink

    That’s the downside of buying in a hot market, it becomes very hard to get in at an affordable price. Some local markets have already started to show signs of cooling as you can see it in some headlines. Hopefully for you this will lower the prices to reasonable amounts. Unfortunately, having lived in California for 3 years, I can completely agree with you that finding anything for under $1500/month is next to impossible right now.

    Also, in your monthly mortgage calculations, if that is your absolutely upper budget? If so, you might need to add a little extra breathing room for unplanned expenses. For example, what if you need to replace a window, fix a leak, etc.? You should consider setting aside a certain extra monthly budget for this so that you don’t get surprised.

    Although a 50 year interest only mortgage might work now, I’d say this is probably no better than renting. I would actually suggest that it might even be worse! Consider this: you’re succeptible to interest rate increases (which as you’ve seen from this article they can quickly increase you’re monthly payments), you have to cover all repair expenses, etc. All this and at the end of the term you still don’t own the property! Sure with inflation the real price of the house will drop, but you have to be comfortable with a lot of initial risk for that reward.

    It’s possible that buying is not the best option for you right now. Sometimes renting is advantageous. You’ll find online a lot of article that debate renting versus buying, and I mean a lot! This is expected, especially in a hot market. When a real estate market reaches it’s peak, it’s often better to rent than to own simply because the numbers no longer make sense. Not always, but generally. If you want to read a good article about renting versus buying you can find one here at TheStreet.com that I found very good at explaining what to look for.

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