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Why You Should Say “No Thanks” to a 50-Year Mortgage

November 29 2018
by Leisl Bailey

Amortization schedule close-up with a pen

Roughly 65% of Americans currently have a mortgage on their home. So, if you need financing to pay for your home (as opposed to purchasing it all cash), then you are not alone.

As you might imagine, there are many different types of mortgages. There are also many interest rates, mortgage lenders, and loan terms. So, picking the right kind for you can be a difficult choice, especially if you are a first-time homebuyer.

While there are pros and cons to each type of home financing, we are here to warn you about a particular kind of mortgage that is typically a bad idea for everyone involved: the 50-year mortgage.

It is typically never a good idea to take out a mortgage this long. Here’s why:

What is a typical mortgage?

The most common type of mortgage is a 30-year mortgage. However, sometimes homeowners choose to pay off their homes in as little as 15 years, depending on their personal financial situation.

Within these typical timeframes, there are also a few common types of loans that people use to pay off mortgages:

FHA Loan

FHA loans are fixed-rate mortgages backed by the government and insured by the Federal Housing Administration.

Fixed-Rate Loans

Fixed rate mortgages are loans where the interest rate remains unchanging for the life of the loan. These loans are usually the most popular ones because you can avoid higher interest rates as the loan is paid out.

VA Loan

VA, or Veterans Affairs mortgages, are loans guaranteed by the United States Department of Veterans Affairs and eligible to veterans who served time in active duty.

Interest-Only Loan

For this loan, your repayments only cover the interest on the amount you have borrowed, during the interest-only period. There is no reduction in the principal during this time. Then, after a pre-agreed amount of time, the loan changes to a principal and interest loan.

How is a 50-year mortgage different than a typical mortgage?

50-year mortgages are primarily a cash flow tool.

This means that people apply for and use 50-year mortgages without the intent to actually pay them off over 50 years. This is because the monthly payments are significantly lower than a typical mortgage. Again, in a typical mortgage, you would only have 15 or 30 years to pay off the loan so the monthly payments have to be higher.

So, if a homebuyer is short on cash when they originally purchase their home, they might choose to apply for a 50-year mortgage. At the onset, they accept that the mortgage payments will be smaller, in exchange for more time to pay it back. However, once their financial situation changes, they might choose to refinance the mortgage in order to avoid the higher total interest that paying over 50 years could bring.

Or, they would simply sell their home and never finish paying back the mortgage in the first place.

Are 50-year mortgages a good idea?

No. Not usually.

This is because they can encourage potential homeowners to purchase a home larger and more expensive than they can actually afford under the guise of making smaller payments for longer.

Think of it this way:

You will always, always pay way more in interest than you really need to when you take out a 50-year mortgage. This is because the smaller monthly payments mean that you hardly make a dent in your principal balance each month, giving the interest plenty of time to build.

Speaking of interest, 50-year mortgages almost always carry innately higher interest rates than their 30-year and 15-year counterparts. If you take out a 50-year mortgage, you should expect to pay at least 25% or more in interest than if you paid the same loan off over 30 years instead.

You will also build equity in your home extremely slowly. This means that the portion of your home that you own (as opposed to the bit owned by the bank) will be very small for a very, very long time.

What are good alternatives to a 50-year mortgage?

A good first idea would be to work with your real estate agent to find a property that falls squarely within your budget. You should have enough to cover a 20% down payment. Then, work with your lender to determine if a 15-year or 30-year payback plan makes more sense.

If you current financial situation makes it too hard to pay off the house in 30 years, you need to take a step back. It is likely that this particular property is too expensive for you. Do not let your emotions cloud your judgment. It is not wise to let the “perfect” house put your finances into danger.

However, after working with your lender, it is possible that using the previously mentioned interest only mortgage for a little while could accomplish the goal of solving your cash flow problem.

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Looking for a Realtor who knows the best mortgage to get? The team at Clever are mortgage pros and can help you find a budget-friendly home. Call us today at  1-833-2-CLEVER or fill out our online form to start.