50 Year Mortgages Are Here!?!

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4/17/2006, 9:43 pm

Reliant Home Warranty Corporation announced today that it will be the first to market a 50-year amortization for subprime borrowers in North America. They also announced a 5 year blended mortgage (3 years interest only and 2 year P&I) for a 53 year loan!

In today’s financial environment that offers so many odd, exotic mortgage options, I like to compare them to the good ol’ standard, a 30-year fixed rate mortgage. (Regardless of what you hear on tv or read in the newspaper, it’s hard to beat a 30-year FRM.)

Here’s how a 30 FRM compares to a 50 for the purchase of a $250,000 home.

Let’s start at HSH Associate’s web site to get today’s national average mortgage rate. It’s at 6.61% for a 30 year FRM. The monthly payment (principal and interest) required to amortize a $250,000 purchase at 6.61% for 30 years is $1,598.30. (The quick way to compute this is to use Loan Spread Calculator Pro!)

The monthly payment on same loan for 50 years is $1,430.04. Subtract this from the $1,598.30 and it looks like you’ll save $168.26 each month by getting a 50 year loan instead of a 30 year loan!

Multiply that $168.26 by 30 years of payments and it looks better. It sure looks like you’ll “save” $60,573.60 by getting the 50 year mortgage. The problem is that while you’ll save more than $60,000 in monthly payments, you’ll still have 20 year left on the 50 year loan!

And remember those 20 years require monthly payment sof $1,430.04. In other words, you will still owe $343,209.60 on your $250,000 house! In fact, during the 50 years of your loan, you’ll pay a total of more than $858,025 for your house.

The 50 year loan will cost you $282,637 than the 30 year and take 20 more years to purchase.

Doesn’t really make sense, does it? Use Real Estate Calculator Suite to check the numbers for yourself.

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