Just as folks are getting used to the idea of 40-year mortgages, securities issuers are upping the ante, talking about possible amortization schedules of 50 years, according to industry professionals.
“It’s a good idea for consumers,” said John Marcell, president of the California Association of Mortgage Brokers. “There’s nothing wrong with a 50- or 60-year mortgage.”
So far, 50-year loans are only a gleam in a couple of securities issuers’ eyes, according to Mark Douglass, a senior director at the Fitch ratings agency. It’s not possible to get such a loan at present.
In May, Fannie Mae confirmed that the mortgage giant plans to expand its purchase of 40-year mortgages, making such mortgages available to additional lenders. To make 50-year mortgage loans a possibility, Fannie Mae would have to embrace them – and the government-sponsored enterprise has given no indication as to whether it will or not.
But the idea is currently a hot topic in the industry, and 40-year loans are becoming more and more popular, suggesting that 50-year loans might find favor with consumers as well.
By stretching mortgage payments out over a longer period of time, borrowers can lower their monthly payments, even though the interest rates on alternative products such as 40-and 50-year loans are higher. This can be a big help to low-income home buyers or people in areas with high home prices.
Because homes in California are so expensive, Marcell said, alternative loan products such as interest-only loans, adjustable-rate loans and 40-year loans are popular in the state.
“If we include the 50-year mortgage with alternative loan products, this collection of loan products that enables people to become home buyers when they otherwise could not would certainly work in favor of those households,” said Robert Kleinhenz, chief economist of the California Association of Realtors.
Already, 40-year loans are catching on, at least in California. Now, “one-quarter of the loans closed every day (in California) are 40-year loans,” according to Marcell.
Both industry professionals pointed out that the average mortgage is not on the books for 30 years.
“The average house in California is either sold or refinanced after five years,” said Marcell. “The national average is seven years.”
For the first few years of most mortgage loans, most of the payments go to interest rather than principal. This is particularly true of 40- and 50-year mortgages, however.
“With a $400,000 loan, the difference between the payments on a 40-year loan with a 6 percent interest rate versus a 30-year loan with the same interest rate would be $200 a month,” Marcell said. But even less of that money would go toward paying off the house, as opposed to paying interest, he said.
Hence, a 50-year or 40-year mortgage could leave the borrower with precious little equity when it comes time to sell or refinance, the two pointed out.
“We’re lucky in California that we have seen some substantial equity gains. But there are areas between the two coasts where you can’t count on a whole lot of appreciation, so taking out a 50-year loan amounts to breaking even,” Kleinhenz said.
“It’s important to counsel people taking out mortgageloans so they make an informed choice,” Marcell emphasized. Such counseling is especially important with unconventional loans, he said.
“These loans are good for some people. The problem is that they aren’t good for everyone. Everyone in California wants to buy a house, but in some cases, financial disaster could happen by putting them in these products,” the mortgage association president said.
However, a 50-year fixed-rate mortgage is less potentially dangerous than an adjustable mortgage. This is because with an ARM, the payments go up after a certain amount of time, usually 13 months. “Payment shock can get to you,” Marcell said.
“The 40-year or 50-year loan is a fixed rate. It’s going to be there as long as you want it and the payment is not going to change. It’s a safer loan for people who can’t afford a 30-year fixed loan,” Marcell said.
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