In today’s economy, where it seems like everything you purchase is costing more and more, many potential home buyers are looking to a surprising new home loan option-the 50 year mortgage. There are advantages and disadvantages to the 50 year mortgage, thus homeowners should be informed about their lending options to know know what loan is best for them.
Lower Payments verses Long Amortization
There is a significant difference between the payments for a 30 and 50 year note. For example, A $200,000 home that is financed at 6% interest for 30 years will have a payment of approximately $1200. The same house, financed over 50 years, will have a payment totaling $1,052. The lower payment is very attractive to home buyers because it can essentially allow them to buy more house for their money. The downside is the additional 20 years of payments with the 50 year note. The National Association of Realtors reports that the average age of first time home buyers is 32 years old or older. This means that homeowners will be well into their 80’s before the home is paid off.
Equity and Interest
Many contend that the 50 year mortgage is basically an interest only loan. Interest only loans require that just the interest be paid each month and nothing goes toward the principle. The principle balance on a 50 year note does decrease. Let’s look at that $200,000 house again. The house with the 30 year mortgage has a payment of $1,200. At the onset of the loan, $200 of that payment will go towards the principle. The same house with the 50 year mortgage and $1,052 payment has only $52 going towards the principal. It is easy to see how long it would take to build up significant equity in the house with the 50 year note. The total amount of interest paid over the life of the loans is significant as well. A $200,000 home financed over 50 years will pay over $200,000 more in interest payments than one financed for 30 years.
Why Would Anyone Consider a 50 Year Mortgage?
50 year mortgages do make sense for some homeowners. Those who plan to refinance after a few years will benefit from the 50 year note because they will have purchased more house for the money. Also, those who know they will be moving in a few years will benefit from the low monthly payments while they live in the home. Home buyers should be cautious however. If the housing market takes another down turn and the home owner has to sell, he or she may have to take a loss on the sale of the residence because they will have to sell for less than what was paid for the home.
This mortgage is a viable option for some. One must, however, consider the number of years payments will be made, the increased interest payments and the lack of equity that can be built up.
