Mortgage Forum

Zino

As real estate prices have soared lately in several hotspots like Las Vegas, much of California, Florida, and others, banks and mortgage companies are now spreading out payments to 50 years to make them more affordable. Prior to these 50 year mortgages, interest only mortgages were touted as the way to go. The question is which is better.

First let's digress on what an interest only mortgage is. Interest only mortgages or loans aren't permanently interest only. The buyer only has 2 - 5 years, after which they must resume paying on the principle which has grown during that time. Many buyers may find themselves unable to pay the higher payments that come at the end of this interest only period. In this sense, interest only loans are similar to ARM's, and have similar default and foreclosure rates (higher than for regular fixed mortgages where the payment stays the same throughout).

Most banks already offer 40-year mortgages, which account for about 5 percent of all home loans, the report said.


"One of the biggest things in California is the high costs of homes. With rates going up, there's demand from customers (for) longer loans," Alex Diaz Jr., with Statewide Bancorp in Rancho Cucamonga, Calif., was quoted in the report as saying.


Statewide, which introduced its 50-year loan in March, has already received about 220 applications, Diaz said, according to the report.
The 50-year mortgage also signals that the cooling real estate market is heating up competition among lenders, the newspaper said.


"Mortgage lenders are getting craftier to get the attention of consumers," Anthony Hsieh, CEO of LendingTree, told the newspaper.
But he added that consumers first need to understand the product.
Two issues to keep in mind: A borrower with the 50-year mortgage builds equity very slowly. And because rates on the loans are adjustable, a borrower's monthly payments could rise, the report said.


Mortgage experts caution that the 50-year mortgage is best-suited for those who plan to stay in their home for about five years, while the loan's interest rate remains fixed, the report said.


"If you're going to be there for more than five years, you're gambling," Marc Savitt of the consumer protection committee for the National Association of Mortgage Brokers told the newspaper. "You don't know what interest rates are going to be. I wouldn't do it."


The report of the new 50-year loan comes as the signs mount that the nation's real estate market is cooling.


A 50 year mortgage, basically spreads your payments out and greatly increases the amount of interest you will payback and reduces your buildup of equity. Alex Diaz Jr., vice president of Statewide Bancorp in Rancho Cucamonga, said the 50-year mortgage has particular appeal in California because prices are higher than the rest of the country.

"The 30-year fixed mortgage is great, but with gas prices so high, people we're dealing with are concerned about making prices work, and the 50-year is something they're starting to consider," said Diaz. The real estate market has grown by leaps and bounds in California with the average home selling in excess of $300,000.

The 50 year mortgage does 3 things, it makes it easies for someone to buy a home in these high price areas, it helps buffer and insulate against a housing bubble or possible localized deflation, and it keeps selling prices high. But, so does the interest only loan, or does it?

The problem with the interest only loan is that it does not insulate or protect buyers from increasing principle, negative equity (which can happen if there is a drop in housing prices), and increasing payments. With this in mind, and the fact that there is only a very minor difference in initial payments (payments over the interest only period), clearly the 50 year mortgage is a safer bet and a better way to go.

A good tactic to use is to do bimonthly payments which will reduce the interest and term of the loan saving you thousands of dollars. Many lenders are now offering this option. Yes, as they say, the real money in real estate is made from buying low and selling high. The problem is that in some of these hot communities the selling price ends up being higher than the asking price and houses aren't on the market for long at all. So, buying low is out of the question.

Just try finding a foreclosure or HUD home for sale in California. In these hot communities the money is made by hedging on great yearly increases and returns on additions and expensive upgrades. And money can be made, but with a uncertain future, it is best to have a payment set in stone - always use a fixed term and rate mortgage. You can still sell in five years or less, make money, and have the added comfort of a fixed payment.