Some things get better with time. Wine, for example, tastes better as it ages. Leather looks more supple and distinguished the longer it survives. When it comes to loans, however, age may not always spell "better" for home loan lenders. There is no shortage of loans that give home loan lenders more than enough time for repayment. In Japan, during the real-estate boom that ended disastrously two decades back, 99-year mortgages were offered for some time. In the 1980s, 40-year mortgages began appearing in the U.S market. It wasn't long before 50-year mortgages also became staple offering for home loan lenders.
At present, 50-year mortgages remain more of a novelty than a realistic option. In fact, only a handful of brokers provide them to home loan lenders. What is common is the 40-year loan, which gained a toehold in the industry after the very reputable firm, Fannie Mae, bought them and resold them to investors. Today, around 5 percent of the mortgages in the U.S are payable within 40 years.
The Forty-Year Hitch
Home loan lenders might think 40 years is a wonderful span for debt repayment. After all, with repayment spread out over such a long period of time, they'd have less to pay monthly, right? The answer is no. This logic wouldn't be farther from the truth. 40-year and 50-year mortgages cost more in interest. Even worse, they build up less equity compared to most loans. There are 40-year mortgages that offer home loan lenders a fixed rate for the entire 40 years. These loans, however, charge a quarter of a percentage more than a 30-year mortgage of a similar property. Moreover, market experts caution home loan lenders that 40-year mortgages are often pitched to sell interest-only or option mortgages, both of which build no equity.
Fifty and Feeble
Home loan lenders will find that 40-year and 50-year mortgages are very much alike, except for the ten-year difference. If 40-year mortgages take you years to build equity, 50-year mortgages take you forever. When it comes to deciding which mortgage term to get, consider this rule of thumb. The term should be directly proportional to how long you intend to stay in your home. If you expect to be a homeowner for some time, take a 30-year loan.
Methuselah loans are given that name for a reason. Do not make the mistake of getting one, unless you're certain you're certain you'll live as long as Methuselah did.
