Stupid Investment of the Week! - 50 Year Mortgage

Take the worst problems of one stupid investment and mix them with the biggest concerns of another and you wind up with a Stupid Investment of the Week to the second power. And that's precisely what you will get if you fall for a 50-year mortgage, a relatively new product that is starting to make inroads in the mortgage market, particularly in hot real estate markets like California.The 50-year deals were created in the aftermath of the government's decision to resume sales of 30-year Treasury bonds in early February. The new products are a direct shot fired by some savvy marketers to fit between two other mortgage products that are growing in popularity: the interest-only loan and the 40-year mortgage. Both are designed to help consumers get more house. Stretching out the time frame on a traditional fixed-rate mortgage to 40 years lowers payments, allowing the consumer to buy more house and then accrue equity in the house over the long haul. Interest-only deals also lower payments, but without the benefit of building equity during any time frame in which no principal payments are being made. The 50-year mortgages are not fixed-rate loans, but adjustable deals that carry their introductory rate for five or seven years, then fluctuate for decades to come. Anthony Hsieh, president of LendingTree.com, says he doesn't think 50-year mortgages will get much traction, in part because consumers might wake up to the idea that this is a deal born more out of desperation than sound financial thinking. "If a consumer looks at a 50-year mortgage as the only way to afford that home, to get into a hot real estate market or simply to afford the monthly payment in a refinance, they're really not looking at the potential problems," Hsieh says. "It's a very small portion of the consumers who could use this the right way." The "right way" would involve using the longer amortization schedule to drop initial payments, expecting that there will be a significant increase in income to cover any adjustment in mortgage rates or the costs of a refinance just a few years down the road. But even that plan could turn out horribly wrong.While the 50-year mortgage builds equity, unlike the interest-only deals, the pace of that growth makes a snail look like a race car. The equity appreciation for five years on a 50-year loan is less than 2 percent. And while the payment is lower, it's not necessarily creating a huge savings, because one trade-off consumers make when stretching out the length of the deal is that they pay a higher rate. Ultimately, that means the consumer might well be in the same financial boat in five or seven years, if the rate adjusts and gets ugly enough to make refinancing a smart move. Maintaining the exposure to interest rates, rather than locking in a fixed rate, counteracts the steps the consumer is taking to get an affordable payment now. Barring some sort of windfall, a big increase in income or tremendous price appreciation, the homeowner will still have a tough time affording a new mortgage. And if the value of homes in the area has shrunk during that period, the consumer easily could be underwater on the loan. "It might work to purchase a home with one of these instruments at a time when you expect property values to keep rising and interest rates to remain steady," says Stuart Gabriel, director of the Lusk Center for Real Estate at the University of Southern California. "But if you believe that the path of home prices might change, you probably want to be cautious in your behavior and stick with something more traditional." Hsieh was among several experts to note that there has been a shift in focus for homeowners and buyers in the last five years, to where the key question for many is, "What is my monthly payment, and what can I do to lower it so I can manage my cash flow better or spend more cash on other things?" While a 50-year deal might seem like the only way to buy into a great neighborhood or hot market, consumers need to remember that someday, somehow they will actually have to pay for the loan, and that failing that, they will add to the national statistics showing foreclosures on the rise. Says Gerri Detweiler, author of "The Ultimate Credit Handbook": "If you can't afford a 30-year fixed mortgage, maybe you should reconsider whether you're really living or buying in the right neighborhood. . . . You may not want to settle for something less, but that's all you can really afford." Article Source - Click here. Steer clear of 50-year trail on mortgages by Chuck Jaffe - Chicago Tribune 5/18/2006 Chuck Jaffe is senior columnist for MarketWatch. If you have a comment or a suggestion, you can reach him at jaffe@marketwatch.com, or Box 70, Cohasset, Mass. 02025-0070. Appraisal , Real Estate , Appraiser , RESPA , Bloomington , McLean, Marketing , Regulation , Illinois