A 50-year mortgage is what it is. It is a home purchase loan that adds two decades to the standard mortgage payoff of 30 years. The longer term also delivers very low monthly payments despite its large loan size. Still, would the savings from its supposed low payments be worth it in the long run?
(Re)Introducing the 50-Year Mortgage
Its birth could be traced back to California pre-housing crisis where houses were expensive (they still are in some parts) and homeowners were looking for a safer alternative to payment-option ARMs and interest-only loans. The first 50-year mortgage was a 5/1 hybrid ARM, i.e. it has an introductory fixed rate for five years, the rate will float thereafter and the loan amortizes over 30 years.
Nowadays, 50-year mortgages are usually fixed-rate mortgages. You send in the same monthly principal and interest payments until your final payment finishes off the loan during its 50th year. Of course, you don’t have to stick around that long to pay it off but that’s how the loan is structured.
Because 50-year mortgages often finance higher-priced homes beyond the conforming loan limits, they are not purchased by Fannie Mae or Freddie Mac. With fewer lenders and select markets, they can have higher costs than traditional mortgages.
Breaking Down the 50-Year Mortgage
The 50-year mortgage has these main pros and cons:
- Very low payments
- Higher interest costs
- Higher interest rates
- Slow equity buildup
Very Low Payments Equal Savings
The 50-year mortgage’s low monthly payments get to homebuyers the most. Its very long term stretches out the loan payments, making it possible for them to go really low.
To illustrate how low the 50-year monthly payment (principal and interest) compared to its 15- and 30-year fixed counterparts, let’s suppose you take out a $300,000 loan with a 4.14% annual rate.
- With a loan term of 15 years, your monthly payment is $2,240.
- With a loan term of 30 years, your monthly payment is $1,457.
- With a loan term of 50 years, your monthly payment is $1,185.
On the 50-year mortgage, you’d be paying $272 less than on the 30-year mortgage or free up $783 that could have gone toward your 15-year mortgage.
These savings are very appealing to homeowners who have other uses of their funds every month.
Higher Interest Costs, Though
Based on our examples earlier, if your loan amortizes over 15 years, you’d be paying total mortgage plus interest of $403,231. Meanwhile, your 30-year loan will cost $524,363 in all. The 50-year mortgage, principal plus interest, will cost $711,044.
Note that the 50-year mortgage has the highest interest costs among the three fixed-rate variants ($411,044). The 50-year mortgage amortizes just like any fixed-rate mortgage, the interest portion of the loan gets to be paid first until such time as more of the payment goes to the principal.
But you are adding 20 years to what is normally 30 years of amortization when you take out a 50-year loan. This leads to higher interest costs paid throughout its life.
Also Higher Interest Rates
Even if you were to refinance or modify the loan before its term is up, lenders calculate their risk over the 50-year horizon. Because their money is tied to a longer-term finance vehicle, they charge a higher interest rate.
Interest rates on 50-year mortgages can be a quarter above the 30-year rate. However it varies, the 50-year rate will always be higher than the 15- and 30-year mortgage rates.
Equity Buildup Is Slow
For a loan that amortizes over 50 years, it will take a while for your payments to eat at your loan’s principal. This slows down the buildup of equity, which is pretty useful when you refinance or haggle with your lender.
That’s why the 50-year mortgage is often compared to that of an interest-only loan in a sense that it puts the borrower in a position with having little equity. Still, the interest-only loan is an ARM which is a risky product if you think of floating rates.
Is a 50-Year Mortgage a Yes, No?
It actually depends. A 50-year mortgage may be for you if you can afford a pricier home and take out a larger loan to back the purchase. Your credentials could include an excellent credit standing, higher reserves, and savvier in mortgage dealings.
Still, if you think 50 years as too long a time and want to curb the costs, you can always take out a mortgage for a more affordable home with a shorter term. However you want it to be, weigh your options carefully.
Justin McHood is a managing partner at Suited Connector and has been recognized by national media outlets as a financial expert for more than a decade.