Bankrate: 50-Year Mortgage Debuts in California

The Methuselah of mortgages has arrived: the 50-year home loan.
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Think of it as a mortgage that has been supersized. Like that other supersizer, McDonald's, the massive mortgage was born in Southern California's San Bernardino County. Statewide Bancorp of Rancho Cucamonga began offering the loan in late March, to California residents.

Advertisements have yielded a lot of phone calls and "quite a few applications," says Alex Diaz Jr., vice president of Statewide.

Half of first-time home buyers are 32 or older, according to the National Association of Realtors. If those buyers get 50-year mortgages and never refinance or make extra payments, they won't pay off their loans until they're well into their 80s.

Would they be crazy to get loans that amortize or pay off the balance over 50 years instead of the standard 30 years? Not at all, Diaz says.

Getting a 50-year loan is a perfectly rational way to avoid an interest-only or payment-option adjustable-rate mortgage, he says.

With an interest-only mortgage, the minimum monthly payment doesn't put any money toward principal. A payment-option ARM goes a step beyond that: In some circumstances, the minimum monthly payment doesn't even cover the interest accrued that month. You make a minimum payment at the beginning of the month, and four weeks later, you owe more than you owed before the payment. This condition is called negative amortization, or "going negative."

Forgive borrowers for thinking that it makes better sense to amortize a loan over 50 years than to get an option ARM or interest-only mortgage.
"Payment-option ARMs and interest-onlies have been so popular, we wanted to come out with a longer-term, fully amortizing loan for people who don't want to go negative," Diaz says.

Regulators and consumers worry that foreclosures will surge in coming years, especially among homeowners who got interest-only and payment-option ARMs. The 50-year loan is a lifeline for them, Diaz says.

"There are two markets for this," he says. "One is if they're looking to purchase a home, because of how expensive housing is, they'll consider this loan. And the other is payment-option ARMs -- borrowers are making minimum payments and they're starting to panic a little bit and look for vehicles to get out of these loans."
About a quarter of new mortgages in California are 40-year loans. This is the next logical step, Diaz believes.

Statewide's 50-year loan is a 5/1 hybrid, meaning that the introductory interest rate lasts five years and then the rate is adjusted annually, moving up and down with the London Interbank Offered Rate, or LIBOR.

Bystanders are dubious of the half-century loan's benefits.

"If you run the amortization out, it basically is an interest-only loan, in all practical terms," says Jason Flurry, a certified financial planner and president of Legacy Partners Financial Group in Woodstock, Ga. "If a person is considering something like that, they're probably trying to squeeze into too much house to begin with."

But just about everyone in California is trying to buy too much house. Of the houses sold in the state in February, half cost more than $535,470. Is a 50-year mortgage really an alternative to an interest-only loan? Yes, but it's not necessarily the best option.

"You're not talking about a significant savings in any event," says Jim Sahnger, mortgage consultant for Palm Beach Financial Network in Sewall's Point, Fla.

A 50-year loan has lower monthly payments, but the total cost is astronomically higher than that of a 30-year mortgage because you're stretching out the payments for two decades longer. It's impossible to guess how much higher because the rate moves up and down annually for the last 45 years of the loan.

But just for grins, let's compare a 30-year fixed-rate loan with a mythical 50-year fixed. For a 30-year loan of $300,000 at 6.5 percent, principal and interest cost $1,896.20 per month. A 50-year loan for the same amount and at the same rate costs $1,691.15 per month in principal and interest.

The 50-year loan costs $205 less per month, but the payments stretch out for 20 years longer and will cost a total of $332,058 more.

An interest-only loan at 6.5 percent would cost $1,625 per month for the first 10 or 15 years, and then the payment would jump.

Sahnger points out that few people live in one house for 30 years and hardly anyone for 50 years. A lot of home buyers move into a house knowing that they will move out within five years. Most of those people are well-suited for lower-rate hybrid adjustable mortgages, Sahnger says.

As for the 50-year mortgage, it's a good attention-getter, Sahnger says: "People are trying to differentiate themselves in the marketplace."
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