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Why a 50-Year Mortgage is a Bad Idea
Friday, 19th May 2006 (by J.D.)This article is about Choices, House and Home, News
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I hope that most people understand that an extra-long mortgage is a fool’s game. If not, check out 50-Year Mortgages: No Shelter for the Strapped at Yahoo! Finance. Author Laura Rowley hits the nail on the head:
A few lenders in California recently introduced 50-year adjustable-rate mortgages. The headline on the USA Today story was: “Need to keep house payments low? Try a 50-year mortgage.” This may be the worst possible way to portray this marketing ploy from the slowing mortgage industry.
Apparently these fifty-year mortgages aren’t even fifty-year mortgages at all; they’re five-year adjustable-rate mortgages with the repayment term extended to fifty years. And they’re terrible deals. Take a gander at how much it would cost to finance each $100,000 of a loan based on current interest rates:
|
|
5-year ARM, |
5-year ARM, |
5-year ARM, |
|
Interest Rate |
6.41% |
6.66% |
6.96% |
|
Monthly Payment |
$626.16 |
$596.89 |
$598.62 |
Rowley, displaying a wry wit, admits “the 50-year mortgage is superior to an interest-only loan [...] because $5,000 in home equity is better than negative equity.”
I don’t know enough about fifty-year mortgages to say that they’re bad under all circumstances, but if you’re considering one of these products, please consult a competent accountant, financial planner, or mortgage broker. (And if your mortgage broker is recommending this to you, seek the advice of a second and third mortgage broker.) I’d be worried about any product the real estate industry loves, especially one that delays equity accumulation in your property.
MarketWatch named the fifty-year mortgage their Stupid Investment of the Week. Apparently an outfit called Statewide Mortgage in California is the only place currently pushing these loans. Be warned.
One Response to “Why a 50-Year Mortgage is a Bad Idea”
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May 19th, 2006 at 8:07 am
This is where understanding the numbers really helps. If any of you own the program Excel, it comes with a mortgage amortization template that crunches the numbers for you.
BTW, the kind of logic outlined above also clearly demonstrates why stretching out credit card debt to 30 years is a really bad idea. Although stretching out the debt period wouldn’t increase your interest rate, the reduction in monthly payments would not make the effort worthwhile.
Also, negative equity is possible even if you’re paying off part of the principle. This happens when housing prices decline, leaving you owing more than the house is actually worth.