As the housing market cools and the refinancing boom dries up, lenders are working hard to win borrowers over with unusual loans. Among these loans are 40- and 50-year mortgages. These extra long-term loans only make up a small fraction of all mortgage originations a year and will probably never become the new standard. However, it is important to understand for whom these loans are well suited before the promise of lower monthly rates sucks you unnecessarily into half a century of high-interest house payments.
The immediate appeal of these long-term mortgages is obvious; a longer period of time to pay a loan means that the monthly payments will be lower. However, 40- and 50-year loans don’t reduce monthly payments all that much when compared with traditional 30-year fixed loans. While some will jump at any opportunity to lower their monthly expenses, it is important to know what you will be risking if you decide on an extra long-term loan. 40- and 50-year mortgages come with higher interest rates and build equity much more slowly than traditional loans. Consider this: If you assume a mortgage for $300,000 and you decide on a 30-year loan, you will end up paying $398,334 in interest compared to a 40-year loan which will cost you $591,725 in interest.
If you find your dream home that you plan to live in for the duration of the loan, it makes sense to choose a shorter-term loan so you don’t pay more interest than necessary to pay for your home; on the other hand, if you plan on moving or refinancing in the near future, you may consider these long-term loans. Essentially, 40- and 50-year loans are short-term solutions that are best for people who need the slightly lower monthly payments because they’re temporarily strapped for cash, and who do not intend to hold on to their mortgage until the end of the term. By no means is this a good choice for the majority of borrowers who plan on staying in their homes for a long time and who hope to create wealth by building equity.
The basic rule of thumb to follow when you borrow money is to get the lowest interest rate and the shortest term you can afford. Borrowers need to understand the true costs of various mortgages as they pursue the lowest-possible monthly payments while trying to qualify for increasingly expensive homes. If you find yourself in this particular situation here is what you should do:
1) Consider your goals. For most people, homeownership is a way to build wealth. If real estate appreciation slows, the market won’t be building wealth for you and you’ll need to do it yourself by paying down equity.
2) Match the mortgage to your time frame. You can protect yourself from soaring interest rates by making sure your rate is fixed at least for as long as you plan to remain in your home.
3) Settle for less house. Stretching yourself too thin to buy a house is a recipe for disaster. Even if no major systems break down, the routine costs of maintenance and repair can swamp someone who is unprepared. Also, house payments that are too high for the homeowner to comfortably afford can result in deferring other important goals such as saving for retirement. Do yourself and your finances a favor by making sure you pick a house you can truly afford.
Do plenty of research to find the mortgage that’s right for you. To see how much interest you will pay and how much equity you will build with a certain loan, check out www.bankrate.com and plug in your numbers.
SGI Solutions, LLC is a private real estate investing company based out of Hartford. To learn more about SGI call 860-524-9338 or visit their website at www.sgi-solutions.net.