Fifty year mortgage may be on the horizon

40 year mortgage may not be long enough

The lending industry has long been aggressive about producing new products. It makes sense; the more different types of loans they have to offer, the greater the number of people who can qualify for a loan. The days of offering just a single product, the 30 year, fixed rate loan, are long gone. Instead, we have adjustable rate loans, 15 year loans, 30 year loans, and 40 year loans.

Soon, we may even have a 50 year loan.

Fifty years? Half a century? For many people, especially those who are older than 30, the notion of paying on a home for half a century must sound insane. It’s difficult enough to imagine the prospect of paying for a house for 30 years, but 50 years just makes no sense. That’s two thirds of the average lifetime! What is the lending industry thinking?

They are thinking about two things - issuing more loans and making more money. The housing market, which grew explosively during the first five years of the decade, has begun to slow down. There are several reasons for that. One is that interest rates, which were running in the five percent range, have been steadily rising for the past two years. The other is that housing prices have reached record high levels, making homes unaffordable for a number of people who would like to buy one.

The ever-resourceful lending industry is always looking for ways to work around problems, and rising interest rates and sky-high housing prices are, indeed, problems. The 40 year mortgage, introduced a few years back but just now gaining popularity, permits buyers to purchase homes that they otherwise might not be able to afford. The longer term of the loan allows for lower monthly payments, and ultimately, it’s the amount of the monthly payment that matters to buyers.

The 50 year mortgage would offer even greater monthly savings, as the principal would be paid over a period of time that is two thirds longer than for a traditional, 30 year loan. This could attract buyers into even the most expensive neighborhoods while still keeping payments to a reasonable amount on a monthly basis.

There is, of course, no such thing as a free lunch. The lower monthly payments are nice, but the longer terms of the 40 and 50 year loans mean that borrowers would be paying interest over a longer period of time. That interest adds up to tens of thousands of extra dollars for the lender. The 50 year mortgage would add ten years of extra interest payments on top of that, making for a fairly lucrative product.

An additional “feature” of these loans is that both the 40 and 50 year mortgages would carry higher interest rates than the standard 30 year fixed rate loan. On average, each ten years added to the loan would carry a premium of about 1/4 of one percent. 

Still, if you need a longer loan to afford a house, you need one. While these extra long term mortgages may not be right for everyone, they do offer additional flexibility, and that is always welcome. And if you take out such a loan and decide later that it was a bad idea, you can always refinance later.