50-year mortgages: low payments, low equity |
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Of course, when you figure in the fact that the 50-year
mortgage realistically will cost you 0.5 percent more in interest,
whatever benefit you might see with the 50-year mortgage all but
disappears: The monthly payment of $1,127 would save you only $73
per month, and the total interest would rise to $476,460.
Different versions
Not all 50-year loans are the same. While some loans offer a fixed-rate
for 50 years, others offer options that include a fixed rate for
the first three or five years, then switch to an adjustable rate.
Still other versions amortize the principal over 50 years but require
a balloon payment after 30 years for the balance of the loan.
California-based Statewide Bancorp started offering
50-year loans last year, with fixed-rate, as well as ARM, versions.
Both types run for 50 years with no balloon payments required. So
far, more than 1,000 borrowers have opted for the mortgages, says
Diaz, the institution's executive vice president. "What we
saw was the ability to have a low monthly payment," he says.
Borrowers are likely to "be looking for a short-term
solution, knowing they want to be using this as a starter home,"
says Diaz.
"In a state like California, we're having housing become more and more unaffordable," he says, so borrowers are looking at longer mortgages -- and smaller payments -- to help them get into the market.
Who benefits?
Proponents of the product warn that it's not for everyone. "It doesn't fit everyone's bill," says Marcell.
Buyers who consider these products should, "step
back from the buyer's frenzy," he says. "Ask yourself:
Does it make sense? What are the pros and cons? What's the best
thing that could happen to me? What's the worst thing?"
Because you pay so little toward the principal, it's not a good choice for someone who might want to move within a few years. "I like to think these people are going to stay with that particular product for at least five years," says Marcell.
A buyer should also be anticipating some sort of increase in income, he says.
But when that money comes, "Go ahead and pay
more money against it," says Hanzimanolis. At that point, the
smart buyer starts making payments equivalent to a 30-year or 15-year
note. But, similar to handling credit cards, many consumers mean
well but don't follow through.
"It's great for certain people, but if you're
looking at making the minimum payment and just the minimum payment,"
it's not for you, says Hanzimanolis.
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