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Deal Or No Deal: The 50-Year Mortgage

By manybanking.com Staff
In March 2006, a group of banks in Southern California debuted a new mortgage product—the 50-year mortgage. Just over a year earlier the 40-year mortgage, which first appeared in the 1980s, was given new life by Fannie Mae.

These longer-term loans offer additional options for borrowers who cannot qualify for 30-year mortgages. While the 40-year mortgage did gain some traction, the 50-year mortgage is still not very popular.

It’s no surprise that this even-longer mortgage product originated in Southern California where home prices at the time were so high that most average homebuyers were frozen out of the market. The 50-year mortgage stretches out the time required to repay the mortgage, which makes the monthly payments lower. Consequently, some borrowers who just missed qualifying for a traditional 30-year mortgage (or a 40-year mortgage) might be able to qualify for a 50-year mortgage.

In exchange for the lower monthly payments, however, borrowers have to pay a higher interest rate. The higher interest rate in combination with the longer term translates into significantly more total interest paid over the life of the loan. The vast majority of borrowers will not keep a 50-year mortgage for the full term, however. In fact, virtually all 50-year mortgages are 5/1 hybrid loans that offer a temporary fixed rate that becomes adjustable after the fixed period is over. Most 50-year mortgages will be refinanced before the rate adjusts.

Because 50-year mortgages are hybrids and feature adjustable rates, comparing them to 30 or 40-year fixed mortgages is more difficult. The best comparison focuses only on the first 5 years when the interest rate is fixed.

Let’s compare a $200,000 loan with a 15-year, 30-year and 50-year mortgage. A 15-year fixed rate mortgage currently has an interest rate of 4.94% according to manybanking.com. That mortgage would require a monthly payment of $1,575.34. At the end of the fifth year, the principal would be reduced to $148,937.21. The Mortgage Calculator simplifies these calculations.

A 30-year fixed rate mortgage currently has an interest rate of 5.31%, which would require a monthly payment of $1,111.85. At the end of year 5, the principal would only be reduced to $184,450.18, which is $35,512.97 less than with the 15-year mortgage.

Assume a 50-year mortgage has a starting interest rate of 5.56% (0.25 higher than the 30-year rate). Because 50-year mortgages are not very common, it’s difficult to determine an average rate. This loan would require a monthly payment of $988.38. At the end of the fifth year when the rate is scheduled to adjust, the loan principal will have only been reduced to $195,742.60. Consequently, this borrower would have $11,292.42 less equity with 50-year mortgage than with a 30-year mortgage. Over the 5 years, however, the borrower will have saved $7,408.20 in monthly payments.

The difference in equity between the 30-year and 50-year mortgage amounts to a 52% return on investment (ROI) for the increased monthly payments. Over 5 years, that averages out to a little over 10% a year, which is a substantial ROI for most individual investors. Unless a borrower is unable to qualify for a traditional 30-year amortization, there is little reason to opt for the longer-term loans. At the term is stretched out longer the difference in monthly payments becomes less compelling.

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