Fifty year mortgage a better choice than some other loans

California’s 50 year home loan avoids negative amortization

The mortgage industry has been quite innovative in the last few decades, introducing a variety of lending options in order to make buying a home affordable for just about everyone. The surge in home prices of the early part of this decade has made housing unaffordable for many, and the industry has responded again with a new, 50 year home loan.

This loan has been introduced in Southern California and other lenders will probably take it nationwide shortly. We have written about this in the past, mostly pointing out the negatives associated with this type of loan. Yes, the payments are lower, but the extra 20 years of interest payments more than compensate for it. Over the half century lifetime of the mortgage you will pay an extra amount of interest that is roughly equal to the purchase price of the house when compared to a 30 year loan. Is it worth it?

It may be if your only other choices are poor ones. In markets like California, houses are nearly unaffordable for many people. Despite that, everyone needs a place to live. When you combine those two things, borrowers are left with some unpleasant choices - take out interest only loans or other risky mortgages, such as the Option ARM. With an interest-only loan, the buyer pays no principal for an agreed-upon period of time, which can range from 3-10 years. With the Option ARM, the buyer has four choices each month regarding how much to pay - an amount that would pay off the house in 30 years, an amount that would pay off the house in 15 years, an interest-only payment, and a “minimum” payment that doesn’t even cover the interest that accrues that month on the loan. If you make the minimum payment, the amount you owe will actually increase after you write the check! This unpleasant increase after you pay is known as negative amortization.

And yet, many buyers take out such loans because they provide the only means of buying a house. And they make the minimum payment because they cannot afford anything else. Proponents of the 50 year mortgage point out that the loan has a positive amortization schedule. With such a loan, every time you write a check to the mortgage company, some amount of that check will apply towards the principal. It will not be much, especially in the first 20 years of the loan, but it will be positive. Each payment will reduce the amount owed by a little bit. That, in and of itself, makes this loan a better choice for some people who would simply like to avoid negative amortization if at all possible.

These loans are clearly not for everyone; most consumers would probably benefit most from a traditional 30 year fixed-rate mortgage if they can afford one. But not everyone can and interest-only and option mortgages are best suited for those consumers who are well disciplined people who understand exactly how their loan works and how it can get them into trouble if they aren’t careful. For those who want to avoid these pitfalls while still buying a house, the 50 year mortgage might be the best solution after all.