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ASK JULIE

THE RIGHT MORTGAGE

Dear Julie, I have been offered a 50-year mortgage on a house I’m buying. I had never heard of this type of loan before. The loan broker told me that it would reduce my monthly payments by spreading the amount over a longer period of time. What are the pros and cons of this type of mortgage? Should I do it?

You are seeing creative financing at its best. The newly born 50-year mortgage allows a buyer that can’t afford to make the monthly payments required to pay off a typical 30- or 15-yr mortgage because it amortizes the loan amount over 50 years.
This is how it works:
Let’s say you have a 30-year $200,000 loan with a 6 percent fixed rate. Your monthly payment would be approximately $1,200. If you were to have a 50-year loan with the same terms, your monthly payment would be approximately $1,050, a savings of $150 per month. That’s the good news, especially if you are stretching yourself to the max to buy that house.
But the price you pay (and pardon the pun) for the smaller monthly payment comes in the form of much slower pay-down of the balance. In the 30-year loan, $200 of your mortgage payment goes directly to lower your loan balance, while the 50-year loan amount is only decreased by $52 each time you pay your mortgage. This difference may not seem like a significant factor now, but after 10 years, you will actually have built equity of $37,000 in the shorter-term loan compared to less than $10,000 in the 50-year mortgage.
Not all 50-year loans are the same. Some offer a fixed rate for the life of the loan while others offer options that include a fixed period for three to five years and then a variable rate. Some even require a payoff of the balance (also known as a balloon payment) at the end of a specified period.
Now for the most difficult question: Should you do it?
If you are looking for a short-term commitment because you are not planning on keeping this property for more than say three to five years, this may be a good option to consider, especially if the price you are paying is not inflated. When you reduce your principal at a slower pace, you run the risk of going “upside down” on your loan and owing more than the property is worth, so be careful. This is also a better option than the “pick-a-payment,” option ARM or interest-only loans in the market today.
Find out if you have any prepayment penalties through the first few years of the loan in case you wish to refinance your loan in the future.
If you find yourself keeping this loan long term, remember that you can always pay more than the required monthly payment. There are plenty of places on the Web that offer calculators to determine your monthly payments according to your loan terms. One of them is www.hsh.com/calc-amort.html. Go there and figure out how much you should be paying if you had a 30-year loan and, whenever possible, include the extra amount in your monthly check.
If you are a professional who does not have the current income to qualify for your dream home and you are anticipating a significant increase in earnings over the next few years, you may be a very good candidate for this loan. But if you are drowning in credit card debt and the only way you can qualify for the mortgage is by using this rubber band approach, I suggest you reconsider your purchase or your loan terms.

For more information visit www.JulieStav.com
Listen to Julie Stav’s radio program Monday through Friday on your local Univision radio station.