Before I had a blog, I published a newsletter called The Pulse. A while ago, in The Pulse, I wrote that I suspected banks would devise creative tactics as the market cooled, including incredibly long-term mortgages, in an attempt to lure customers with lower monthly payments.
Real estate agents aren’t the only ones who have had a party for the last several years, and the banks are searching for new ways to keep this particular party going into the wee hours.
Problem is, people are much more savvy than the banks are giving them credit for and the 50-year mortgages we’re hearing about are oddball gimmicks. (Sounds very much like a 5 Year ARM to me and we all know that many of those will be “adjusting” over the next few years.)
Holden Lewis of Bankrate runs the numbers:
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.