Just a few short years ago, many people were amazed by the prospect of a 40 year mortgage. While 30 year loan had dominated the market for decades, the idea of being able to spread out your mortgage payments over forty years was just almost too much to comprehend. Now, there is the new 50 year deal and if the 40 year mortgage took the finance world by storm the 50 year mortgage is leaving many people speechless.
But, is a half century mortgage really a good idea? Well, there are certain some advantages to a 50 year mortgage. The most obvious advantage is that it allows a homeowner to spread out the cost of a home purchase and lower monthly mortgage payments. In housing markets where prices have skyrocketed this can be a major pro because it may make it available for individuals to purchase homes who might not have been able to do so otherwise.
Of course, there are also major disadvantages to consider as well. When considering a 50 year loan it is extremely important to consider your age at the time of the purchase. For example, let's say you're 30 at the time your purchase the home. With a 50 year mortgage, your home would not be paid off until you're 80. If you think you'll still be able to meet those monthly mortgage payments long after the age by which most people have retired, this might not be a bad option. On the other hand, if you're looking to be debt free by the time you retire, it's best to consider another option.
It is also important to remember that the longer you draw out the payments on your home purchase, the more you're paying in interest. This is why many critics of the 50 year mortgage are referring to them as interest-only loans. When you stop and actually look at the numbers, you'll see that with this type of mortgage you're paying a lot more in interest for your home that you would with any other type of home loan, even a 40 year mortgage. That's money you might be able to put toward something else, especially if you're looking ahead toward retirement. On a $300,000 home purchase at the going interest rate the monthly payments would be in the neighborhood of $1,800 per month with a 30 year mortgage.
Conversely, with a 50 year mortgage at the same interest rate you could drive down the price of the monthly mortgage payment by about $200 per month. Since, you'll be paying for the home 20 years longer with the 50 year mortgage than you would with the 30 year deal; however, you'll actually end up paying more than $300,000 more for the home over the course of the 50 year mortgage than with the 30 year loan. If you went with the 30 year mortgage and the monthly payment that is $200 a month more, sure you'll spend $72,000 over the course of the next 30 years but then your home will be paid for in full. With the 50 year option you'll still be responsible for that $1,600 a month house payment for the next 20 years.
Every now and then a lender or two will come out with a new product - or reemphasize one that has already been around. While 50 year mortgages are not totally new, there does appear to be a new emphasis on them. The housing market, which has not done so well lately, is seeking to get more people to buy a new house. Here are some things you may want to know about these 50 year mortgages before you buy one.
As the market continues to tighten, making it harder to get a mortgage now, a 50 year mortgage is designed to help people still get one. The main idea is to lower the monthly payments even more than what even a 30 or 40 year mortgage would do.
These 50 year mortgages are adjustable rate loans. Having a fixed rate portion of about 5 years, after that they become adjustable - following the lead of whatever the market rate is at the time. In most cases, the interest rate is adjusted each year.
The interesting thing about a 50 year mortgage, though, is that very few people these days live in one place for more than 5 years. This is a very mobile society. If you are not planning on staying in that same house for at least 10 years, it may not be worth it.
There are two problems with this type of a mortgage. The first thing is that it takes a long time to get any equity built up. This could make it very difficult to get money that you need to move and buy another house later on. There is also the possibility that the market could take a serious dip and housing values take a nosedive. You could end up, even after a few years, owing more than the house is worth.
A second problem is the amount of interest that you will be paying. The difference between a 30 year mortgage and a 50 year mortgage means that you are now paying about two-thirds additional interest. The bottom line is that the house you wanted so bad has now cost you possibly up to six times more than the house is worth, whereas, two to three times is normal.
The interest rate, which will reflect market rates 5 years from when you get it, will most likely increase. How much will it increase? - no one can be sure. Of course, it might even get better but to assume that it will do so for the next 45 years is really taking a chance.
Other mortgages can provide low rates, too. It could work well for you, however, if you are considering staying in the house less than 5 years. By selling it before the adjustable rate starts, it remains entirely predictable up until the change at the 5-year mark.
So, while you think about whether you should get one or not, remember that you would probably be far better off getting one you can really afford - on better terms. It may be smaller, but if you live there long enough - at least it will be yours.
Joseph Kenny has sinced written about articles on various topics from Credit Cards, Debt Consolidation and Credit Cards. Joe Kenny writes for the Credit Card Guide, offering views on in the UK, visit them today for some great. Joseph Kenny's top article generates over 550000 views. to your Favourites.