50-year mortgage debuts in California
The Methuselah of mortgages has arrived: the 50-year
Think of it as a mortgage that has been supersized.
Like that other supersizer, McDonald's, the massive mortgage was
born in Southern California's San Bernardino County. Statewide Bancorp
of Rancho Cucamonga began offering the loan in late March, to California
residents. Advertisements have yielded a lot of phone calls and
"quite a few applications," says Alex Diaz Jr., vice president
Half of first-time home buyers are 32 or older, according
to the National Association of Realtors. If those buyers get 50-year
mortgages and never refinance or make extra payments, they won't
pay off their loans until they're well into their 80s. Would they
be crazy to get loans that amortize or pay off the balance over
50 years instead of the standard 30 years? Not at all, Diaz says.
Getting a 50-year loan is a perfectly rational way
to avoid an interest-only or payment-option adjustable-rate mortgage,
With an interest-only mortgage, the minimum monthly
payment doesn't put any money toward principal. A payment-option
ARM goes a step beyond that: In some circumstances, the minimum
monthly payment doesn't even cover the interest accrued that month.
You make a minimum payment at the beginning of the month, and four
weeks later, you owe more than you owed before the payment. This
condition is called negative amortization, or "going negative."
Forgive borrowers for thinking that it makes better
sense to amortize a loan over 50 years than to get an option ARM
or interest-only mortgage.
"Payment-option ARMs and interest-onlies have
been so popular, we wanted to come out with a longer-term, fully
amortizing loan for people who don't want to go negative,"
Regulators and consumers worry that foreclosures will
surge in coming years, especially among homeowners who got interest-only
and payment-option ARMs. The 50-year loan is a lifeline for them,
"There are two markets for this, " he says.
"One is if they're looking to purchase a home, because of how
expensive housing is, they'll consider this loan. And the other
is payment-option ARMs -- borrowers are making minimum payments
and they're starting to panic a little bit and look for vehicles
to get out of these loans."
About a quarter of new mortgages in California are
40-year loans. This is the next logical step, Diaz believes.
Statewide's 50-year loan is a 5/1 hybrid, meaning
that the introductory interest rate lasts five years and then the
rate is adjusted annually, moving up and down with the London Interbank
Offered Rate, or LIBOR.
Bystanders are dubious of the half-century loan's
"If you run the amortization out, it basically
is an interest-only loan, in all practical terms," says Jason
Flurry, a certified financial planner and president of Legacy Partners
Financial Group in Woodstock, Ga. "If a person is considering
something like that, they're probably trying to squeeze into too
much house to begin with."