50 Year Mortgages?
Filed Under Loans
That’s right, to entice those who would not ordinarily be able to afford to purchase a home, lenders are now offering 50-year-mortgages. These 50 year mortgages are not only enticing to those who think they cannot afford a home, they are also persuading many to purchase a home they could not afford with a traditional 30 year mortgage. When you spread the same amount of money across 50 years, the monthly payment is much more affordable. Those low monthly payments are easy to sell to the thrifty consumer, but are they really a good idea. The answer is — maybe.
50-year-mortgages are a good alternative to an “option adjustable rate mortgage”, or an option ARM. With this type of loan the consumer is offered several payment options each month. The problem is, if you choose to make just the minimum required payment, then the unpaid interest is added on to the principal. If the principal grows too much, then you might find yourself owing more than the initial loan amount. Basically, you keep making your payment but the amount you owe continues to grow. I don’t recommend this type of mortgage, unless you are a pillar of self-discipline in finance. It is all too tempting to simply make that minimum payment each month. A 50-year-mortgage on the other hand has the advantages of a lower monthly payment, but as long as you make your monthly payment the principal won’t grow.
You may want to consider a 50 year mortgage if you are already considering an interest only mortgage. Interest only mortgages allow you to pay a low monthly payment for a set period of time, but when that time expires you will be required to start paying off the principal with a much higher payment each month. The 50-year-mortgage offers the advantage of low monthly payments without having to face these large payment increases.
The one reason you may want to avoid a 50-year-mortgage may be that you want to build equity in your home. One of the main reasons Americans are so convinced that home ownership is far superior to renting, is because it offers the opportunity to build equity. Simply by paying for your mortgage payment each month, you are essentially saving some of that money in the value of your home. When you pay rent to someone else the money is lost; it is gone forever. This being one of the main attractions of home ownership, the 50 year mortgage minimizes your ability to build equity. This is because the percentage of your monthly payment that actually goes to principal is very small.
So if you are mainly interested in low monthly payments, then the 50 year mortgage may be right for you. It offers low monthly payments with minimal risk in a stable traditional style mortgage. If you want to build equity in your home go for a 15 year, 20 year or a traditional 30 year mortgage. These offer greater opportunity to build equity in a shorter amount of time.
