Sunday, February 26, 2006

50-year Mortgages: Another Sign of the Apocalypse?

Could this be the next sign that the end is near (the first sign was that Legally Blond 2 actually got made into a movie)? My mother-in-law mentioned the other day that she saw a piece on the news about the possibility of 50-year mortgages being available in the near future. So, I searched around the net for more info and found an article stating that 50-year mortgages may be next in The Honolulu Advertiser.

Let me start by saying that I didn't even know that there was such a thing as a 40-year mortgage, I thought that it was capped at 30-years. Now lenders are thinking about adding 50-year mortgages to their already large list of options for buying a house. I think that it is pretty much a sure bet that they will add these loans as it only means more money in their pockets in the end. The reason that I think that these are so bad for borrowers is two-fold. First, there will be 20 more years, over a traditional 30-year loan, for interest to accrue. The second problem is that these loans will have a higher interest rate attached to them as well. So, you have you loan accruing more interest for a lot is going to hurt when some people look at what their house will actually cost them in the end with one of these loans. This was actually one of the biggest surprises I encountered with both of my houses, seeing what my final cost will be after 30 years. I don't actually remember what the final numbers were, but they were staggering, I was in shock.

My bet is that a lot of people will look at these new long-term loans as being good because their monthly payments will be lower. The article states that "home buyers could get a 40-year $100,000 mortgage at a rate of 6.50 percent which meant their monthly loan payments were $585.00, according to HSH's Gumbinger. A 30-year loan, meanwhile, had a 6.25 percent rate and a home buyer with a $100,000 loan had a monthly loan payment of $616." I already know too many people that will just look at that and want to get this loan.

To prove this thought, I will tell you about 2 sets of people that I know and their mortgage thoughts. Keep in mind that all of these people are well educated (all have more than 4 years of college), intelligent, and make good money. Couple 1 are making maybe just over $100,000 a year combined and are paying for their first house with 2 mortgages. For their mortgages, they got 2 ARMs because their monthly payments would be so low. They apparently didn't think long-term...rates were at all time lows when they bought, it was a perfect time to just get a 30-year mortgage. Now, they are stuck since rates are starting to rise and their mortgage contract will not allow them to refinance without incurring a penalty. In their defense, their entire mortgage was a mistake. They asked for 2 30-year fixed mortgages, but the bank somehow messed it up and by the time that they realized, it was too late.
Couple 2 does not own a house yet, they are just about to start looking. They probably make just under $200,000 a year combined and are looking for houses starting at $600,000. The mortgage that they want to interest-only loan. WHAT??? I am always amazed at the things they say when I talk to all of them about it. It generally comes down to them seeing such a low monthly payment and thinking...why wouldn't we get the loan with the lowest payment, then we could have more money left over for spending. These are my well-educated, well off friends...imagine how the rest of the world could be impacted.

People will lower their monthly payments, giving them more money to spend each month since we already know how bad Americans are at saving. It wouldn't be as bad if someone got a loan like this with a low monthly payment and invested the difference, but I would guess that unfortunately doesn't happen much.


Anonymous Phil said...

This is probably bad only if people decide to take the entire 50 years to pay off the principal. Most people won't live in their house that long. If they do take 50 years, then that's bad (assuming they aren't putting the difference into something with a higer return). If it's the difference between buying a house and not buying a house, then it's good. If it's the difference between buying a house and buying a house with a plasma TV, then it's bad.

But, what if you can only afford a 50 year payment now, but can afford higher payments as time goes on? Most YPs call into this category, especially for married couples where one is still in school. You can treat the 50 year like a 30 year where the payments increase over time as income increases.

2/26/2006 2:55 PM  
Blogger RS said...

I agree Phil, if you can be good about it, then it probably isn't bad. It becomes bad if you don't pay it off ahead of schedule or use the extra money for unnecessary consumer products.

2/26/2006 8:32 PM  

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