| During the past few weeks several mortgage | | | | is that potential interest costs increase |
| lenders have announced that they will now | | | | substantially with time.Total Potential |
| offer 50-year mortgages. This is a curious | | | | Interest:15-years: $170,397.9820-years: |
| idea, but not as curious as it could be: At | | | | $236,812.6625-years: $307,686.4530-years: |
| the height of the real estate boom in Japan | | | | $382,633.4740-years: $543,057.8150-years: |
| some homes were financed with 100-year | | | | $714,690.40The huge interest-costs over 50 |
| mortgages.The 30-year mortgage that is now | | | | years surely seem formidable, but is that |
| the gold standard of American home finance | | | | really the case?There are several issues to |
| was once virtually unknown. In the early part | | | | consider.If you can buy an appreciating |
| of the 20th century most mortgages in the | | | | property then a long-term loan may be |
| U.S. were "term" loans, mortgages that lasted | | | | advantageous when compared to the |
| just five years. Since most of the debt could | | | | alternative: No financing. If you cannot |
| not be repaid in five years, at the end of | | | | qualify for other loan products because the |
| the term owners would go out and get | | | | monthly cost is too high or for other |
| replacement five-year mortgages.This system | | | | reasons, then 40- and 50-year financing may |
| worked fairly well until the 1930s. Then the | | | | be attractive.If you get a fixed-rate |
| Depression drove down employment levels and | | | | mortgage you have protection against rising |
| shredded property values. In the west, the | | | | interest costs. In effect, a hedge.If you |
| Dust Bowl impacted many states.But then a new | | | | expect your income to rise in the future, a |
| idea arose. The just-formed Federal Housing | | | | longer-term loan may allow you to buy now |
| Administration (FHA) said it would guarantee | | | | instead of waiting until you have a larger |
| the repayment of 20-year loans if borrowers | | | | paycheck -- or waiting until prices are |
| would pay insurance fees. Private lenders | | | | higher.If you have a fixed-rate mortgage and |
| followed with their own longer-term mortgages | | | | have the right to prepay, in whole or in |
| and the result was that term loans largely | | | | part, at any time and without penalty, then |
| disappeared from the U.S. marketplace.Over | | | | you have two attractive options: First, as |
| time the accepted definition of "long-term" | | | | your income grows you can make monthly |
| financing changed from 20 years to 25 years | | | | prepayments that reduce the loan term and cut |
| and then to 30 years. Forty-year mortgages | | | | potential interest costs. Second, if rates |
| have been available since at least the | | | | decline you can refinance -- an attractive |
| 1980s.What's the attraction of long-term | | | | choice given that loans today can often be |
| loans?Fixed-rate, long-term financing | | | | refinanced without the need for much (or |
| represents stability. If times are tough you | | | | sometimes any) cash at closing. (That's not |
| don't have to worry about qualifying for a | | | | to say there is no cost to close, but that |
| new loan. And if rates are fixed, then rising | | | | you can finance closing costs and thus avoid |
| interest levels are not a concern.But | | | | the need to come up with cash.)This is the |
| longer-term loans also have another value: | | | | biggie: The potential cost over 50 years is |
| They may allow borrowers to qualify for more | | | | not a worry if you only have the loan for |
| financing.Suppose we want to borrow $300,000 | | | | five years, 10 years or whatever. |
| at 6.5 percent interest. With fixed-rate | | | | |
| financing, the monthly costs for principal | | | | Would I get a longer-term mortgage? |
| and interest would be as follows:Monthly | | | | Actually, I have.Long ago I bought an |
| Mortgage Payments: Principal & | | | | investment property with a 40-year loan. |
| Interest15-years: $2,613.3220-years: | | | | Since then rental rates have increased and |
| $2,236.7225-years: $2,025.6230-years: | | | | the property has long thrown off a positive |
| $1,896.2040-years: $1,756.3750-years: | | | | cashflow each month. No less important, the |
| $1,691.15 | | | | value of the property has increased some 400 |
| | | | percent -- value I would not have if the |
| The list above plainly shows that the longer | | | | property could not have been purchased.So the |
| the term, the lower the monthly cost for | | | | next time someone mentions a longer-term |
| principal and interest. The practical | | | | loan, don't laugh. Check rates, terms and |
| advantage of longer monthly payments is that | | | | conditions; it may well be that a long-term |
| borrowers can obtain larger loans. Compared | | | | loan is what you need to get the property you |
| with 15-year financing, using a 50-year loan | | | | want with the income you have |
| would reduce cash costs by more than $900 a | | | | now.----------------------------------------- |
| month in our example.Monthly payments are not | | | | ---------------------------------------Peter |
| the only consideration, however. Borrowers | | | | G. Miller is a syndicated real estate and |
| should also look at potential loan costs. | | | | personal finance columnist who appears 70 |
| Because longer-term loans are, well, longer, | | | | newspapers.Search lenders offering 50 year |
| money is outstanding for a greater period of | | | | mortgages or go here for online refinancing |
| time than with 30-year financing. The result | | | | and second mortgage loans . |