Buying a home on a half-century plan
Think: “Ben-Hur.” Think: Galley slave Charlton Heston, shackled to Oar No. 41. The drum beats, and he rows ... and rows ... and rows....
That’s what crossed my mind when the mortgage industry rolled out the 40-year mortgage not long ago. And now, with the concept of a 50-year mortgage, that image is positively embedded.
The 50-year loan isn’t a reality -- yet -- but don’t be surprised when you hear the term from your friendly neighborhood mortgage lender. It’s a concept that’s being batted around in the industry, according to an analyst who sees the loans as being -- well, better than some other kinds of loans.
“We’ve gotten some queries from some [loan] issuers,” explained Mark Douglass, a senior director at Fitch Ratings, which analyzes risk for investors. “To the best of our knowledge, though, nobody has started to offer a 50-year mortgage yet.”
But he isn’t betting against that happening, because the mortgage business is embracing longer-term loans.
Forty-year mortgages, for example, took off last year and have become popular in the so-called sub-prime category, loans for consumers with blemished credit. But even those 40s may be old news.
“We’ve seen 45-year mortgages being offered,” said Douglass, who heads Fitch’s research into residential mortgage-backed securities. “It’s rather early to say whether [the 45-year loan] will become as popular as the 40-year ... [but] there’s good reason to believe that the 45s will catch on, to some extent.”
That’s because stretching out the amortization means a smaller monthly payment. A 30-year, $100,000 mortgage, for instance, at 6.5%, carries a monthly tab of about $632. But make it a 50-year loan at the same rate, and borrowers will repay about $564 each month.
But for 50 years? Lots of houses don’t even last that long, not to mention the borrowers. The view in the industry, though, is that the number of years tacked on to a loan is, in a sense, irrelevant.
“Most mortgages don’t exist for the full life,” Douglass said. “It would typically be prepaid, sometimes well before its final maturity. The borrower is moving, or they’ve refinanced, or what have you.”
And the lower monthly payment makes homeownership possible for more people, advocates of the 40-year loans point out.
Plus, Douglass said, these fixed-rate loans have predictability that some others do not.
“One of the things that the 40s or 45s or 50s have going for them is that you don’t have the same kind of payment shock that you have with an option adjustable rate mortgage or an interest-only loan,” two wildly popular kinds of mortgages whose monthly costs adjust -- almost inevitably upward -- over time.
That “payment shock” is a source of worry within the federal government. In December, several federal agencies jointly issued guidelines urging lenders to be more stringent in qualifying borrowers for those specialty adjustable rate mortgages and interest-only loans and to offer more details about the terms in their advertisements.