Pittsburgh Homes Daily

News stories about 50 year mortgages have been going around, including this one from Yahoo and USA Today.  While I support the option, I don’t think it is generally a good idea.

I have heard that there was alot of negative publicity the first time car loans repayable over 5 years were created.  Now they are common.  But a 50 year mortgage?

For a $200,000 loan balance at a 6% interest rate over 30 years, monthly payments are about $1,200 and total interest over the life of the loan will be $232,000.  Extend that same loan to 40 years, and your monthly payment is $1,100 and total interest over the life of the loan is $328,000.

Interestingly, the Yahoo mortgage calculator tops out at 40 years.  So I had to go to DecisionAide’s calculator.  Monthly payment for 50 years would be $1,050.  For an extra $150 a month, the 30 year loan looks like a good decision.

50 year mortgages probably aren’t meant for $200,000 loans … at least not yet.  So for a $800,000 loan, over 50 years, the monthly payment would be $4,200.  Over 30 years, the monthly payment is $4,800.  My best guess is that extending the loan from 30 years to 50 years adds $600,000 to $700,000 in interest payments on this loan.

I understand and support options that give individuals more flexibility.  I’d just rather see mortgage companies qualify individuals for a 30 year loan and an extra $600 a month than impose a 50 year loan and $600-700K of interest.  My guess is that the risks of default to the mortgage company are pretty much the same.  And the tax credits for mortgage interest aren’t that good.