So you're squeezed and feel the impulse to lower your monthly mortgage payments by switching to a 50-year mortgage... Is it possible? Yes. But should you do it? Depends. After a decade-long red-hot real estate market, home prices have reached new highs. USA Today has reported that in California, for example, only 14 percent of people could afford a median-priced home in December, when the median was $548,430, according to the California Association of Realtors. Due to such pressures on home prices, both home buyers and lenders are now trying to cope with a new problem the rising interest rates aimed at cooling off the market. The traditional 30-year mortgages are now competing in the market with their 50-year siblings that offer a lower monthly payment in return for 20 more years of payments. There are also a number of banks offering something in between 40-year mortgages, representing about 5% of the total mortgage market. Such an arrangement would obviously give you more purchasing power than otherwise available. Regions Bank mortgage loan officer Brian Arnold, quoted in an Arizona Republic story, said the difference in the payment is not that much, but it may allow that borrower to go from $100,000 to $120,000 loan. The downside is, homeowners would have to wait much longer to build up any equity in their property, as reported recently by CNNMoney. A second problem is the adjustable rate that typically kicks in after the first 5 years. That means the borrower can be vulnerable to sudden hikes in interest rates for a period of up to 45 years. Thats why some experts think if you are going to stay in your house for over 5 years, then 50-year mortgages may not be the most logical choice for you. And what real savings are involved here? According to calculations made by Noelle Knox and Mindy Fetterman of USA Today, a 30-year loan of $300,000 at 6.5 percent, principal and interest cost $1,896.20 per month. A 50-year loan for the same amount and at the same rate costs $1,691.15 per month in principal and interest. So the consumer would save $205 a month while paying $332,058 more over those extra 20 years. For some people thats a steep and unacceptable tradeoff between lower monthly rates and hundreds of thousands of dollars lost in equity. And what if, on top of everything else, your property requires major repairs after the first 30 years? That would be another factor eating into your equity that comes with holding a 50-year mortgage. So there you have it for those hard pressed for immediate cash, a 50-year mortgage might be the answer. But others, who look at the issue from a long-term perspective, see a downside or two. You have to make the decision depending on various factors such as your intended length of stay in the property and your long term equity needs. But at least the alternative to 30-year mortgages is here and will likely stick around for some time while the market tries to take a break from these sweltering prices and rising interest rates. ------------------------------------------------ (520 words, Copyright May 2006 Ugur Akinci) by Ugur Akinci, Ph.D.
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