50-year mortgages: low payments, low equity
By Dana Dratch • Bankrate.com

Get cold sweats just contemplating 30 straight years of mortgage payments? You ain't seen nothing yet.

Home buyers shopping for a loan may notice a new kid on the block: the 50-year mortgage.

Some mortgage lenders see the idea as an alternative to "interest only" loans and a tool to shrink those monthly obligations -- especially in high-ticket areas such as California.

"It's hard for some people to conceive this is happening," says John Marcell, immediate past president of the California Association of Mortgage Brokers. "But it makes a lot of sense. You'll be able to buy a more expensive home than you could qualify for otherwise."

But some consumer advocates and financial professionals worry that buyers who need to stretch payments over 20 more years are coveting too much house.

"It's definitely a bad idea," says Dave Ramsey, author of "The Total Money Makeover," and host of a nationally syndicated radio show on finances. "The family is still not building net worth," he says. "It's still just keeping the family in debt."

50-year mortgage better than interest-only?
Alex Diaz Jr., vice president of Statewide Bancorp of Rancho Cucamonga, Calif., says the 50-year plan is better for the borrower than an interest-only or payment-option adjustable-rate mortgage. In an interest-only mortgage, the minimum monthly payment means zero is being applied to the outstanding balance.

A payment-option ARM can be worse -- sometimes the minimum monthly payment doesn't even cover the interest accrued that month. You could make a minimum payment one month and find the next month that the outstanding balance grew.

While the 50-year fully amortized mortgage certainly means a slower rate of repaying the balance, at least the balance is being reduced, not remaining stagnant or increasing.

But Allen Fishbein, director of housing and credit policy for the Consumer Federation of America, disagrees. "Some might say it's more akin to leasing than buying," he says, because the percentage of the payment applied to principal is very low. It's probably not the product for someone who wants a home for more traditional reasons, such as creating a nest egg, he says.

Currently, you're not likely to find 50-year home loans at your bank or credit union. Most of the loans are coming from mortgage brokers, says Marcell. "We're starting to see several of the wholesale companies offering that now," he says.

Fishbein agrees.

"I'm hearing about it more from reporters or industry people than consumers and consumer organizations," he says.

"A lot of lenders aren't offering them," says George Hanzimanolis, president-elect of the National Association of Mortgage Brokers. "They are relatively new," he says.

50 years of interest payments, too
And while they can fit certain buyers in special circumstances, "I don't think the average consumer will benefit from a 50-year mortgage, because of all the interest over the long term," Hanzimanolis says.

Rates for 50-year mortgages tend to be about 25 to 50 basis points higher than the rates on 30-year fixed-rate mortgages, Marcell says. A basis point is one-hundredth of a percent.

Critics contend that, for all practical purposes, a 50-year mortgage isn't much different from an interest-only loan.

"It's basically another way of saying 'an interest-only mortgage,'" says Ramsey. "You're going to be stuck forever in that thing -- it's quicksand."

While the monthly payment is lower, you'll also pay more interest.

Comparison:

The monthly payment -- not including taxes and insurance -- would be $148 lower with the 50-year mortgage, but the entire $148 saved would be taken away from principal. Over the course of the 30-year mortgage the total interest paid would be $231,676, but with the 50-year loan the total interest would be a whopping $431,685 -- $200,000 more. Over the 20-year difference in the loans, that would mean you would be paying an average of $10,000 more per year in interest in order to get your monthly payment lowered by $148, or $1,776 a year.