Steer clear of 50-year trail on mortgages
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The 50-year mortgages were created in the aftermath of the government’s decision to resume sales of 30-year Treasury bonds in early February. The new products are a direct shot fired by some savvy marketers to fit between two other mortgage products that are growing in popularity: the interest-only loan and the 40-year mortgage. Both are designed to help consumers get more house. Stretching out the time frame on a traditional fixed-rate mortgage to 40 years lowers payments, allowing the consumer to buy more house and then accrue equity in the house over the long haul. |
While the 50-year mortgage builds equity, unlike the interest-only deals, the pace of that growth makes a snail look like a race car. The equity appreciation for five years on a 50-year loan is less than 2 percent. And while the payment is lower, it’s not necessarily creating a huge savings, because one trade-off consumers make when stretching out the length of the deal is that they pay a higher rate. Ultimately, that means the consumer might well be in the same financial boat in five or seven years, if the rate adjusts and gets ugly enough to make refinancing a smart move. Maintaining the exposure to interest rates, rather than locking in a fixed rate, counteracts the steps the consumer is taking to get an affordable payment now.
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