During The 1980s, Mortgage Interest Rates In America Topped 18% , Prompting The Introduction Of The 40 Year Mortgage

Category: Finance, Mortgages.

With the 40 year mortgage becoming increasingly common in states such as California, where high home prices make mortgages less affordable for the average home- buyer, the latest mortgage product has been rolled out- the 50 year mortgage. The 40 year mortgage increased in popularity again in 2005, when Fannie Mae introduced a program to offer these extended- term mortgages.

During the 1980s, mortgage interest rates in America topped 18% , prompting the introduction of the 40 year mortgage. In 2007, approximately five percent of all mortgages are 40 year mortgages, with that figure reaching 25% in high- cost housing markets such as on the West Coast. While this type of mortgage further reduces the monthly cost of loan repayments, there are some definite disadvantages involved. With the 40 year mortgage becoming a more main- stream product, the 50 year mortgage has been introduced. The Pros. There s not always a huge difference between the monthly repayment on a 40 year mortgage and on a 50 year mortgage, but those few dollars can mean the difference between affording your own home now and having to wait a few more years to save a larger down- payment. The main advantage of choosing a 50 year mortgage is a fairly obvious one- the extended terms of the mortgage make monthly repayments lower, and it means that owning a home becomes more affordable.

One of the important things to note about the 50 year mortgage is that after the first five years, the interest rate is adjustable. This is one of the aspects of the 50 year mortgage that keeps that initial interest rate so low. That means after the fixed- rate period is over, your interest rate can increase and decrease along with current market rates. If you re looking for a low- cost mortgage with a view to refinancing within five years, the 50 year mortgage can be a good way of approaching this. Options such as interest only loans or balloon mortgages offer initial lower payments, but these come with some very risky drawbacks. Finally, the 50 year mortgage is typically a safer way of affording a home if you re unable to afford a conventional 30 year fixed- rate mortgage.

Unlike other low- initial- cost mortgage options such as the interest- only mortgage, there s no possibility that you ll end up with negative amortization with a 50 year mortgage. The Cons. This makes it a much safer way of achieving a lower- cost mortgage. Of course, the 50 year mortgage has some drawbacks of its own. That 50 year long will reduce the amount you must pay each month, but over the life of the loan it s going to cost you. Tacking that extra ten years onto the terms of the loan means you add a big chunk of interest, making the total cost of the loan significantly higher.

In addition, the interest rate on a 50 year mortgage is typically slightly higher than with a 30 year or even a 40 year mortgage. It may not be much- less than 1% -but even that adds several thousand dollars to your loan total. Longer terms mean increased risk for the lender, and you pay for that risk with extra percentage points on your interest rate. Another disadvantage with the 50 year loan is a result of the way in which mortgage payments are structured. The longer the terms of the mortgage, the longer it takes to build up equity in your home- more than twice as long to build up just 20% equity in comparison to a 30 year mortgage. All conventional mortgages are front- loaded with interest, meaning that the first years of repayments are almost all interest, and you don t start paying off a significant amount of principle immediately.

A related problem with this very slow build- up of equity occurs in cases where your down- payment is less than 20% of the home s appraised value. With a 50 year mortgage, it ll take much longer to reach 20% , so you ll be paying extra for private mortgage insurance for much longer than with any other type of loan. In these cases your lender typically requires you pay for private mortgage insurance until you reach that 20% equity figure. What does this mean for Home- Buyers? The 50 year mortgage shouldn t be considered a long- term loan, simply because those extended terms are so expensive in the long run. For people who find that the 30 or 40 year mortgages aren t affordable, the 50 year mortgage can make the dream of home- ownership a reality, but these mortgages are best used with a view to refinancing as soon as possible. As long as you re planning to refinance within five to ten years, the 50 year mortgage is a good alternative to riskier low- cost products such as the interest- only mortgage.

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