50-year mortgages can end up costing borrower


Published: Thursday, June 1, 2006 at 6:01 a.m.
Last Modified: Wednesday, May 31, 2006 at 11:29 p.m.
NEW YORK - When it comes to home mortgages, some people are thinking really long term by taking 40-year or 45-year - or even 50-year - loans.
The attraction is lower monthly payments, which make these mortgages more manageable for some families. The disadvantage is that consumers can end up paying much more interest during the life of the loan than they would with a traditional 30-year mortgage.
Only a handful of lenders currently are writing 40- to 50-year mortgages, but experts believe others will follow if they prove popular with home buyers.
Among the consumers looking at a 50-year mortgage is Larisa Meyer, 35, who is buying a 100-year-old home in Minneapolis.
Meyer, a self-employed graphic artist, said it's important to her to keep her monthly mortgage payment low because her income can be irregular. At the same time, she doesn't want an exotic mortgage, such as an interest-only loan, because she wants to build equity in her new home.
"A big part of selecting a 50-year mortgage is the payment size," Meyer said. "I also know that in a few years, I will have some equity. It won't be a ton, but there will be some."
Still, consumers should be forewarned that most of the longer-term mortgages do not have a fixed interest rate like many 30-year mortgages do.
The loan Meyer is considering carries an interest rate of 6.5 percent for the first five years, and then the rate can be adjusted annually, said Eric Pirius, a loan officer at River City Mortgage & Financial in Eagan, Minn., who is working with Meyer. It also requires a "balloon payment" of the outstanding balance after 30 years, although the presumption is that most mortgage holders will have refinanced long before that.
"I haven't talked to a client yet who intends to hold a mortgage for 50 years," Pirius said. "But that low payment helps people qualify. It gets them into that home and getting the tax benefits of ownership."
He calculated that a consumer who took out a $250,000 mortgage at 6.5 percent for a 30-year term would pay about $1,580 per month. That mortgage on a 50-year payment schedule would require monthly payments of about $1,410 - a savings of about $170 a month.
Some housing experts are skeptical that the 40- to 50-year mortgages will be widely used.
Keith T. Gumbinger, vice president of HSH Associates, a mortgage information service based in Pompton Plains, N.J., said 40-year mortgages have come in and out of favor, last gaining some popularity in the mid-1980s when interest rates were so high many consumers didn't qualify for loans.
The major drawback of the longer-term mortgages, he believes, is that "equity builds extremely slowly" so there's little advantage compared with interest-only loans.
And, he said, a consumer could end up spending a lot more in interest payments.
For comparison purposes, Gumbinger calculated the cost of mortgages of various lengths with a fixed rate of interest. On a $275,000 mortgage for 30 years at a fixed rate of 6.75 percent, a consumer would make monthly payments of $1,783.64 and pay $367,112 in interest during the life of the loan. That same mortgage at the likely higher rate of 7 percent for a 40-year term would require monthly payments of $1,708.93 and result in $545,290 in interest. At 7.25 percent for 50 years, monthly payments would be $1,707.45 and total interest would be $749,476.
"You really can't think of these as long-term financing vehicles because the interest cost is overwhelming," Gumbinger said.
Anthony Hsieh, chief executive officer of LendingTree, an online mortgage marketplace based in Charlotte, N.C., said he believed some lenders were promoting 40- and 50-year mortgages "to stir up some excitement" as interest rates have risen and cooled the housing market.
Hsieh said he didn't know of any lenders offering 50-year mortgages with the rate fixed for the entire term.
"They call it a 50-year, but the rate generally is fixed for only five or 10 years and they use a 50-year amortization table," he said.

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