The 50-Year Itch

3 Minute Read

Most homeowners know that the longer your loan term is, the less you pay each month, but the more interest you will pay. One bank in California has taken this concept to an all-time high; they have introduced the 50-year mortgage.That's right - 50 years. The loan is being offered by Statewide Bancorp of Rancho Cucamonga. Statewide's vice president says the loan is a good way for people to afford housing in the expensive Golden State.

He adds that the loan is better than the interest-only loan, where your payments only go toward the interest for the first few years so you build no equity. Rest assured they are both very bad choices.

Think About This

Think about how long 50 years is... by the time you pay off the loan, your high-school-age child will be ready to retire. Even with today's longer life spans, you may not live to see the end of the loan.

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On top of that, the 50-year rate is only locked in for the first five years. After that, it is adjusted annually according to the London Interbank Offered Rate. Not only is the term of the loan long, but the interest rate can go up! That's double dumb and will lead to a disaster.

This is just another case of the banking industry making it easier for people to buy more house than they can afford. More than half of the houses sold in February in California cost more than $535,000. If housing is too expensive, then don't buy a house!

Let's look at the numbers. If you take out a 15-year fixed-rate loan (which is what Dave recommends) at 7% interest on $150,000, you will have monthly payments of about $1,348, and you will pay $92,683 in interest over the life of the loan.

Now take out a 50-year loan with the same interest and amount. The payments come out to $900. But you would pay over $391,000 in interest alone! In most states, you can buy a pretty nice house (maybe two) with the extra interest you pay on a 50-year mortgage.

Don't Be Fooled...

... by the 50-year loan. It doesn't mean you have more money each month. It is a classic case of the old story of the frog in boiling water: it will sense the pain and immediately jump out. But if you put the frog in room-temperature water and heat it up gradually, it will not sense the change and gradually be boiled to death without even knowing it.

That's what a 50-year mortgage does. Every month, you pay a smaller house bill, but in actuality, you are paying several hundred thousand dollars more in interest than you need. The smaller bills make you think you're getting ahead, but it's quite the opposite; it's a great way to fall behind!

Dave recommends you take out no more than a 15-year fixed-rate loan where the payments are 25-35% of your take-home pay. Make sure you are able to put down 20% of the purchase price to avoid paying private mortgage insurance. Don't rush into buying a house.

You will cause yourself pain and heartache if you sign up for an absurd mortgage payment or a long-term loan. If you are financially and emotionally ready to buy a house, it is a dream. If not, it will become a nightmare.

Get a real estate agent in your area you can trust.

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