50-year mortgages: low payments, low equity
Page | 1 | 2 | 3 |

Some loans also carry prepayment penalties through the first few years of the note. Since you're already not building much equity, this can make it more expensive to refinance in the early years of the loan.

Be prepared to refinance
Since buyers often look at a 50-year loan as a temporary solution, refinancing or resale before the home is paid off is a virtual certainty. Weigh that going into the deal, too.

Analyze how a shortage of equity could affect refinancing. Unless you pay extra money toward the equity or see a dramatic increase in the value of your house, your refi will probably be a lot more like simply buying the same house all over again.

Remember, the length of the 50-year loan also means it takes many more years before meaningful equity buildup kicks in. With almost any conventional mortgage, you pay more interest and less principal during the earliest years of the loan. Because you're paying significantly less principal each year than with a 15-year or 30-year mortgage, you really don't want to use it for a property that you're going to keep less than five to 10 years, says Ron Phipps, broker with Phipps Realty in Warwick, R.I.

Assuming no down payment and no increase in property value, a 30-year loan on a $200,000 home will leave you with almost $14,000 in equity in five years and about $37,000 in 10 years. With a 50-year mortgage, you'll have about $3,000 in equity in five years and about $7,400 in 10 years. And relying on appreciation to boost your stake in your home is certainly not a sure thing, as evidenced by the marked slowdown in home values.

So with a 50-year loan, you can't count on pulling out a chunk of equity when you go to the closing table to refinance, which means you may have to come up with closing fees and other costs out of your own pocket.

You also need to analyze your escape options. Ask, "If I need to sell, what's it going to cost to extricate myself?" says Phipps.

Compare the costs now to the potential costs a few years down the road. If you do have to pony up some cash, can you handle it? And be honest with yourself, too. If you're truly convinced that you can produce that amount on short notice without a problem, can you bank it now just in case?

Prime candidates for 50-year mortgages would be professionals who don't have the current income to qualify for their dream homes but are anticipating significant increases in their earnings over the next few years. A longer loan, where buyers are paying mostly interest, allows them to get the house now, then take out a more traditional loan when their income goes up later.

In many cases, that goes against conventional financial wisdom, which holds that counting on -- and living off -- future earnings is often a bad idea. Even if that anticipated increase does occur, you might also get thrown a curve in the form of additional expenses or lifestyle changes. And absent a hefty down payment, a market downturn could leave you owing more than the house is actually worth.

"It's a very dangerous situation," Ramsey says.

Dana Dratch is a freelance writer based in Atlanta.