Fifty-Year Mortgages:
Is More Always Better?
Following close on the heels of the interest-only mortgage, the fifty-year adjustable rate mortgage (ARM) is the new kid in the in-crowd of specialized loans. Just as it sounds, this is a loan which has an end date fifty years from its inception, which, for most people, means a lifetime of loan payments.
HSH Associates, Financial Publishers, refers to this type of loan as a “Hybrid ARM”, of which there are many varieties. Without getting into the finer points of interest adjustment ratios, the bottom line question is “What makes a fifty-year mortgage attractive to home buyers?” The simple answer to that is that the payments are lower. With the loan stretched out over fifty years, payments can be as little as half of those for a 30 year mortgage, and even lower comparative to a 15, 10, 5 or 1-year ARM.
A home valued at $500,000, for instance, with a 5/1 adjustable rate mortgage of $400,000 at the current rate of 5% (many hybrid mortgages offer unusually low rates, and this is just one example—check with your lender for current rates in your area), your monthly payment would be $1816.56, of which $1666.67 will be interest at the beginning of the payment series. You would reach the half-way point (owing $200,000) after 453 payments (37 years and 9 months). By that time you would have paid a total of $822,901.63 of interest and principal. Again, note that you would be nearly 40 years into the mortgage and still owe $200,000 of principal!
Now consider that a standard 30-year 1/5 ARM would cost far more initially--$2796.87 per month—but you would reach the halfway point in 265 payments (that’s a little over 22 years) and would have paid $617,642.11 by that time. That’s a saving of roughly $205,000. Run the numbers out to the end of the loan period and the difference grows dramatically.
The purpose of a long-term loan is the reduction of the monthly payment so that more of your income can go to pay down other debt. The longer the term, the lower the payment. But the interest continues to accrue. The more quickly you pay down the loan, the less interest you pay in the long run. Pay slowly, and interest mounts quickly. In some cases of “payment-option” ARM’s, it is quite possible to enter the “negative amortization” zone. That is, you can make your monthly payment and owe more than you did before you sent the check.
By now you are probably muttering about the fact that the numbers above are based on a house price that is above average for many places in the country and a mortgage interest rate to match. In fact, 1/5 ARMS are in the neighborhood of 6.35% and rising, and I chose a higher-than-average price because many home buyers still believe that it is fiscally sound policy to buy all the house they can afford . . . and then some. The hybrid (reverse, interest-only and 50-year payout) mortgages have made it possible for people to buy more house than they can rationally afford in the hope that housing prices will continue to boom and there will be significant equity into which they can tap down the line when they need cash. The average housing price has climbed in some areas into the area that used to be reserved for the elite, and the price is buying less and less house.
Sadly, this “buy all you can buy” philosophy, which was prevalent in the mid-70’s, doesn’t hold water in an economy that is both inflationary and dangerously fragile. Corporate downsizing, out-sourcing, and the current trend towards smaller raises and give-backs in the form of benefits packages are taking the air out of the balloon. Though the housing bubble isn’t in danger of an immediate and drastic burst, it has almost stopped growing in some areas. According to sources in central New Jersey—always a high-priced market—houses are staying on the market longer and the bidding frenzy that drove them up has begun to slow. They are selling for the asking price instead of at a premium. New development houses are selling faster than existing homes, but the market has assumed a slow-and-steady pace that differs considerably from the rush of a year ago.
So, take on a 50-year mortgage, figure you probably won’t be staying in your present home for the entire fifty years, and you can begin to see that the low payments disguise a serious problem when you want to sell. You may have paid hundreds of thousands of dollars, have little in the way of equity in the house, and wind up handing over whatever the market brings directly to the lender with nothing left for a down-payment on your next home. Worse, if you have continued the game by borrowing against the equity you did manage to accrue, you could conceivably “go negative”—that is, owe more than you did when you took out the original loan.
Regulators are concerned with the surge in foreclosures. Foreclosures are at an all-time high primarily because borrowers are overwhelmed by the choices they are being offered. There are so many options, and so many of those are alluring in their promise of lower, more manageable monthly payments, that buyers are signing before they truly understand what they are in for in the long run.