50 Year Mortgage - Are You Sure?

The 30-year mortgage has been around forever. Within the last 10 years we have seen the emergence of the 40-year mortgage. And now, in the last couple of months, the introduction of the 50-year mortgage. We knew it was coming, we just didn't know when. Are you sure this mortgage is right for you. Let's look at who should consider this type of loan and why.

Right Place, Right Time
This type of loan should only be considered under certain specific circumstances. There are parts of our country where the real estate market is booming and the prices you must pay for a home in those areas is several hundred thousand dollars. And this is not for a new home, this could be for a home less than 2,000 square feet built in the 50's. If you happen to live in one of those areas you know exactly what I'm talking about. Home ownership for couples early in their careers is very challenging, and realistically unaffordable without some creative financing. That is where the 50-year mortgage comes in. It's intention is to allow people in these areas an opportunity for home ownership that didn't exist before. Spreading the payments out over 50 years may lower your monthly payment enough to make home ownership a reality.

What's The Catch?
I'm glad you asked. Most, if not all, 50-year mortgages are 5/1 Adjustable Rate Mortgages. This means that for the first 5 years your interest rate is fixed. Beginning in the sixth year and every year thereafter, your rate will adjust based on the prime rate at the time. What does this mean for you. It means two things. One, if you love your home and want to live in it for many years, you will want to consider refinancing before the five years is up. Two, with the appreciation the housing market is experiencing in these areas, some will invest in a home knowing they will be selling it in a few years and profiting from the appreciation of the home and paying a lower monthly payment while it appreciates. The last scenario is for the risk takers out there. Because there will always be the what if's. What if the housing market doesn't continue to appreciate? What if I can't find a buyer when the time comes? You get the idea.

Who Really Benefits?
First of all, if you don't live in one of these type of real estate markets, or your planning to stay in your home for many years, it is my opinion not to even consider a 50-year mortgage. For those that do, or those not planning to stay in your home over 5 years, it could be the option you have been looking for to make home ownership affordable. As long as you understand what you are getting into from the beginning. Those who really benefit the most from this type of loan are the banks and mortgage companies offering them. Think about it, the monthly payment you will be making during the first 5 years is mainly interest. All benefitting the mortgage company because no headway toward the principal is being made. So, in reality, you have an interest only loan for the first five years. If you decide to refinance, the mortgage company or bank benefits again because you are converting to a new fixed rate mortgage and starting over for 30 or 40 years. So, you may be excited because you can finally become a home owner, but the financial institutions are the most excited of all.