The Mortgage Reports Blog

Ironically, 50-year Mortgages Are A Short-Term Borrowing Solution

The Chicago Tribune's Mary Umberger wrote an interesting piece on the lengthening of mortgage terms, from 30-years to 40-years and now to 50-years.  It ran in Sunday's Business section on the front page.

Mary talked to me as a part of her research on 50-year mortgage story, about which I said:

Dan Green, a mortgage planner with Mobium Mortgage Group in Chicago ... said some of those credit-impaired borrowers might be good candidates for the 50s.

The borrowers would use the ARM to leverage the equity from their homes to pay off debt and improve their credit scores--then refinance out of the 50-year loan to something with better terms.

"It's ironic that the longest available amortized loan is really a short-term solution for some people," Green said.

Her article highlighted some of the lenders that offer the product, while noting in the same breath that Wall Street is not showing much of an appetite to buy them. 

50-year loans carry relatively high interest rates and, therefore, are a short-term solution for people whose credit scores are too low to qualify for interest only loans, but are still in need of a low mortgage payment. 

Typically, that includes the 13 percent of the U.S. population whose credit scores are in the range of 500-579.

By spreading out payments over 50 years, a homeowner can reduce his monthly payments to the lowest level possible while working to improve their credit score. 

Once the credit score improves, the homeowner can remortgage into a more appropriate, lower interest rate home loans that better match their long- and short-term financial goals. In this sense, the 50-year mortgage is the first step of a two-step mortgage plan.

I don't often agree with the Tribune columnists, but kudos to Mary for a deep dig into the story of the 50-year mortgage and recognizing its application as a short-term mortgage solution. 

Too often, columnists deride 40- and 50-year loans without understanding how the mortgage can be properly applied to person's financial goals.

I can't blame the columnists because they are not "in the market" everyday to see what is developing, and how to use it.  Even the venerable Jack Guttentag showed his ignorance about 50-year mortgages, stating, "They're asinine".  His take is that interest only loans are preferred to "going out beyond 30 years". 

He's right, but some people just don't qualify for interest only mortgage products and need the 40- or 50-year term.

Source
Long Way to Go For 50-Year Mortgages
Mary Umberger, Chicago Tribune
July 30, 2006
http://www.chicagotribune.com/business/chi-0607300068jul30,1,7997390.story?coll=chi-business-hed

(Images courtesy: Wikipedia, Shaker Stool)

The 40-Year Mortgage Is No More Risky Than Any Other Mortgage Product But The Media Says Otherwise

Another day, another "mortgages are risky" article in the papers.  Today, the headline of an article in USA Today screamed: "Stretching mortgage to 40 years can be risky".

We get it!  Mortgages are risky.  In any form.  Of any product.  With any terms.  They're risky.

McPaper piece cites the same tired arguments against the 40-year loan:

1. Principal is not paid down fast enough
2. The total interest charges over 40 years are larger than with a 30-year mortgage
3. The 40-year loan is a "desperation" loan for people that should not be even considering homeownership
4. When home values flatten, homeowners with 40-year loans will be left stranded and unable to sell

You have seen these arguments before -- they're the same ones people use debunk negatively amortizing loans such as the Option ARM, and Interest Only products.

What makes them wrong is that these arguments are all based on a single tenet -- that paying down a principal balance is a good thing.  That's not always true.

In fact, purposefully maintaining low levels of home equity can be an excellent mortgage planning strategy.

"New" loan products like the 40-year mortgage are not dangerous to everyone; they are only dangerous to homeowners who operate without a financial plan.  It's not the loan that is risky, it's the behavior of the person paying the loan.