50-year mortgages hit national market

But it will take a half-century to pay off.

A 50-year mortgage is now being offered by several banks across the country – especially banks in southern California.

The option is intended to counteract rapidly rising home prices in the Golden state, where home prices in metropolitan areas averaged as much as $747,000 in the first quarter of 2006, according to the National Association of Realtors.

Missouri prices

The price situation is not so drastic in southwest Missouri – the median home price for the Springfield metropolitan statistical area was only $130,800 in that same quarter.

Most, if not all, of the 50-year mortgage offers at this point are 5/1 adjustable rate mortgages, or ARMs. The rate is locked in for an initial period – in this case, five years – after which time the rate is adjusted once a year, based on prevailing interest rates at the time.

There are no local mortgage lenders currently offering the 50-year loans. It was only recently, in fact, that many began offering the 40-year fixed-rate mortgages that have been available in other parts of the country for several years.

Possibilities

Some firms, however, are looking into the possibility of offering the half-century notes.

Don Kennemer, president of LaDon Mortgage, said that lenders his company works with, particularly those on the West Coast, are offering the 50-year deals.

He said he hopes to be able to offer them locally in the near future, though he didn’t have a specific timetable in place. In July, LaDon Mortgage became one of the first local lenders to offer 40-year mortgages.

“With the 40-year (mortgage), you don’t notice a lot of difference in payments between that and the 30-year,” Kennemer said. “But with the 50-year, you’ll notice a significant amount. Most of it has been a coastal trend, but with the building costs going up, and the Springfield market building some more expensive homes, we see a market for it here.”

Fannie Mae, the Federal National Mortgage Association, began purchasing 40-year mortgages in early 2005; a Fannie Mae spokesperson said the company has no immediate plans to begin purchasing 50-year notes.

Lower prices

Stacy Bacorn, Springfield branch manager at First Horizon Home Loan Corp., said that lower prices locally are one reason that longer mortgages aren’t as popular.

“On the coasts, a lot of people were doing those ARMs, and now they’re coming to the end of that five years, and the payments are going up quite a bit,” she said. “Some people aren’t going to be able to afford their house payment anymore with their payments going up drastically. Luckily, we’re in a protected area where our loan amounts are lower compared to people on the coasts who really see interest rates go up after that initial ARM period.”

Aaron Jernigan, president of the mortgage bank at The Signature Bank, said that the longer-term mortgages may make monthly payments lower, but they could create other problems for home buyers.

“There’s always an increase in rate the more you stretch the length of repayment on a mortgage, so it gets to be where there’s not that much of a difference,” Jernigan said.

Monthly savings; more interest

For example, a $100,000 home mortgaged for 30 years at a fixed rate of 6.625 percent would have monthly payments of $640 for the principal and interest, Jernigan said. The same home mortgaged for 40 years at 6.875 percent would save less than $30 per month.

For comparison, a mythical 50-year fixed rate mortgage at 6.5 percent on a $100,000 home would have monthly payments of $565.71. The cost over the life of the loan, however, would be more than $321,000 – compared to a total for a 30-year mortgage of $230,400. Buyers exchange a lower interest rate for the security of knowing what their rate will be throughout the length of their mortgage.

But while the 40-year and 50-year mortgages will provide lower monthly payments – and interest-only loans provide still lower monthly installments – Jernigan says homebuyers need to seriously consider the ramifications.

“The benefit is a lower payment per month, but your cost is the total amount of interest you’re going to pay over the loan,” Jernigan said. “When people get in and that’s the only way they can afford a certain price level of house, maybe they should lower their target.”

Advantages

The lower-payment options, such as longer terms or interest-only deals, can offer advantages, especially for people whose income varies from month to month.

“Some people will do it who are on commissions or bonuses or expect increases later on in salary,” Jernigan said. “They say, ‘I don’t want the high monthly requirement; I’ll pay the interest only, but then I get quarterly bonuses through my job, so I’ll pay down $2,000 at a time and make up for it.’ If they’re disciplined enough to do it, that’s OK.”

Buyers also need to beware of becoming “upside down” in their mortgage – having more debt on a home than the home is worth.

If homebuyers are diligent and disciplined with their payments, they can successfully negotiate a longer loan.

“As long as you make some payment to the principal, and assuming the rate of inflation stays the same as it has been in recent years, you should be OK,” LaDon’s Kennemer said.