Is The 50 Year Mortgage For You


Is The 50 Year Mortgage For You 1

Is the​ 50-Year Mortgage For You?
During the​ past few weeks several mortgage lenders have announced that they will now offer 50-year mortgages .​
This is​ a​ curious idea,​ but not as​ curious as​ it​ could be: At the​ height of​ the​ real estate boom in​ Japan some homes were financed with 100-year mortgages .​
The 30-year mortgage that is​ now the​ gold standard of​ American home finance was once virtually unknown .​
In the​ early part of​ the​ 20th century most mortgages in​ the​ U.S .​
were term loans,​ mortgages that lasted just five years .​
Since most of​ the​ debt could not be repaid in​ five years,​ at​ the​ end of​ the​ term owners would go out and get replacement five-year mortgages .​
This system worked fairly well until the​ 1930s .​
Then the​ Depression drove down employment levels and shredded property values .​
In the​ west,​ the​ Dust Bowl impacted many states .​
But then a​ new idea arose .​
The just-formed Federal Housing Administration (FHA) said it​ would guarantee the​ repayment of​ 20-year loans if​ borrowers would pay insurance fees .​
Private lenders followed with their own longer-term mortgages and the​ result was that term loans largely disappeared from the​ U.S .​
marketplace .​
Over time the​ accepted definition of​ long-term financing changed from 20 years to​ 25 years and then to​ 30 years .​
Forty-year mortgages have been available since at​ least the​ 1980s .​
What's the​ attraction of​ long-term loans?
Fixed-rate,​ long-term financing represents stability .​
If times are tough you​ don't have to​ worry about qualifying for a​ new loan .​
And if​ rates are fixed,​ then rising interest levels are not a​ concern .​
But longer-term loans also have another value: They may allow borrowers to​ qualify for more financing .​
Suppose we want to​ borrow $300,​000 at​ 6.5 percent interest .​
With fixed-rate financing,​ the​ monthly costs for principal and interest would be as​ follows:
Monthly Mortgage Payments: Principal & Interest
15-years: $2,​613.32
20-years: $2,​236.72
25-years: $2,​025.62
30-years: $1,​896.20
40-years: $1,​756.37
50-years: $1,​691.15
The list above plainly shows that the​ longer the​ term,​ the​ lower the​ monthly cost for principal and interest .​
The practical advantage of​ longer monthly payments is​ that borrowers can obtain larger loans .​
Compared with 15-year financing,​ using a​ 50-year loan would reduce cash costs by more than $900 a​ month in​ our example .​
Monthly payments are not the​ only consideration,​ however .​
Borrowers should also look at​ potential loan costs .​
Because longer-term loans are,​ well,​ longer,​ money is​ outstanding for a​ greater period of​ time than with 30-year financing .​
The result is​ that potential interest costs increase substantially with time .​
Total Potential Interest:
15-years: $170,​397.98
20-years: $236,​812.66
25-years: $307,​686.45
30-years: $382,​633.47
40-years: $543,​057.81
50-years: $714,​690.40
The huge interest-costs over 50 years surely seem formidable,​ but is​ that really the​ case?
There are several issues to​ consider .​
If you​ can buy an​ appreciating property then a​ long-term loan may be advantageous when compared to​ the​ alternative: No financing .​
If you​ cannot qualify for other loan products because the​ monthly cost is​ too high or​ for other reasons,​ then 40- and 50-year financing may be attractive .​
If you​ get a​ fixed-rate mortgage you​ have protection against rising interest costs .​
In effect,​ a​ hedge .​
If you​ expect your income to​ rise in​ the​ future,​ a​ longer-term loan may allow you​ to​ buy now instead of​ waiting until you​ have a​ larger paycheck -- or​ waiting until prices are higher .​
If you​ have a​ fixed-rate mortgage and have the​ right to​ prepay,​ in​ whole or​ in​ part,​ at​ any time and without penalty,​ then you​ have two attractive options: First,​ as​ your income grows you​ can make monthly prepayments that reduce the​ loan term and cut potential interest costs .​
Second,​ if​ rates decline you​ can refinance -- an​ attractive choice given that loans today can often be refinanced without the​ need for much (or sometimes any) cash at​ closing .​
(That's not to​ say there is​ no cost to​ close,​ but that you​ can finance closing costs and thus avoid the​ need to​ come up with cash.)
This is​ the​ biggie: the​ potential cost over 50 years is​ not a​ worry if​ you​ only have the​ loan for five years,​ 10 years or​ whatever .​
Would I​ get a​ longer-term mortgage? Actually,​ I​ have .​
Long ago I​ bought an​ investment property with a​ 40-year loan .​
Since then rental rates have increased and the​ property has long thrown off a​ positive cashflow each month .​
No less important,​ the​ value of​ the​ property has increased some 400 percent -- value I​ would not have if​ the​ property could not have been purchased .​
So the​ next time someone mentions a​ longer-term loan,​ don't laugh .​
Check rates,​ terms and conditions; it​ may well be that a​ long-term loan is​ what you​ need to​ get the​ property you​ want with the​ income you​ have now.



Is The 50 Year Mortgage For You



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