Just when you think it can't get any worse, it does. I've covered interest-only mortgages and no-money-down loans, detailing how bad and risky these loans are. Now, there's another villan to add to the mix: 50-year adjustable-rate mortgages. Here's the headline from Yahoo:
A few lenders in California recently introduced 50-year adjustable-rate mortgages.
As I'm sure you can imagine, I hate this idea, but more on that later. Here's what Yahoo has to say about it:
"I can't really find a viable circumstance where this product really fits somebody," says Keith Gumbinger, vice-president of the financial publisher HSH Associates. "But desperation breeds innovation."
Yes, mortgage loans are slowing, so banks are getting more and more "creative" to spur demand. But this one, though marketed as a great way to lower your monthly payment, doesn't deliver -- in any way. Assuming a $100,000 loan, here's what you're looking at:
"The monthly payment on the 50-year mortgage would actually be higher than it would be on the 40-year, because the (higher) interest rate overwhelms the (longer) term," Gumbinger explains. Even if the 50-year mortgage is available at the same interest rate as the 40-year, the monthly payment would be $575.80 -- a whopping $21.09 a month less. That's not a whole lot of budget-stretching.
And here's the really, really bad news:
I called Greg McBride, senior financial analyst at Bankrate.com, and we had some fun figuring out what someone would pay in interest over the life of a 50-year loan. This requires a few (admittedly wild) assumptions: The borrower qualifies for a 6.5%, 50-year mortgage; interest rates remain steady at 6.5% for the next five decades; and the buyer remains in his home for that period. Someone who takes out a 50-year, $300,000 mortgage will repay $300,000 in principal and $714,000 in interest over the life of the loan. That compares to $382,000 in interest for a 30-year fixed-rate loan, and $543,000 in interest for a 40-year fixed-rate.
And even if you plan to move soon, this isn't a good deal:
Now, let's say the home buyer is planning to move after five years. He figures he'll take out a 50-year mortgage, save on monthly payments for five years, then sell.
Unfortunately, when it's time to move, the homeowner has barely chipped away at the loan balance. For example, at the end of the five years, someone with a 30-year, $300,000 loan has repaid $19,000 in principal; someone with a 50-year mortgage, less than $5,000, McBride calculates.
Yes, it's better than an interest-only mortgage, but not by much. To me, this is yet another loan that's designed to make one big transfer -- the transfer of money from your pocket to the bank's.
So, what do I recommend instead? I'm glad you asked. I have my own, recommended formula for buying a house. It's just not my formula, but one that some (at least one!) Free Money Finance readers support as well.
Yet another way to convince people to buy that home they really can't afford. It never ceases to amaze me the different marketing schemes financial institutions will come with to separate you from your money. It would be one thing if the 50 year mortgage actually acomplished somehting positive for you, but itr sounds like that may be asking too much. Great post.
Posted by: Debt Free | June 02, 2006 at 01:03 AM