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50-Year Mortgage

Can you imagine paying your mortgage for 50 years? That is not something that I would ever consider, but there is an article over at BankRate.com discussing the availability of a 50-year mortgage.

Apparently the 50-year mortgage is being offered by some lenders as an alternative to an interest-only mortgage. However, when you really look at the details it becomes apparent that this really seems to be targeting people that prefer to live above their means. The 50-year mortgage really does not seem to make much financial sense, at least not for those of us striving towards being free of debt and becoming financially independent.

Is There Any Benefit?
If you were trying to decide between the 50-year mortgage and an interest-only mortgage, the 50-year mortgage could be a better option? The reason is that with the interest-only mortgage, you are really not building any equity in your home unless you are paying extra towards the loan. Unfortunately, many people with the interest-only loans are not paying extra each month. With the 50-year mortgage, you are paying a small amount each month towards the princpal of the loan.

Not All Roses.
While the monthly payment will be lower than a more traditional 30-year mortgage, it does come at a considerable cost. Over the lifetime of the mortgage, you will pay nearly double the amount of interest on the 50-year mortgage and have a fraction of the equity given the large payments towards the interest.

In addition, some of the 50-year mortgages are imposing prepayment penalties. This means you could be stuck in this mortgage longer than you would desire and could face additional penalties if you decide to refinance or pay more towards the mortgage. Speaking of refinancing, since this is very similar to an interest-only mortgage you would essentially be purchasing the house all over again if you do refinance early in the term due to the lack of equity being established.

My Thoughts.
In my opinion, using a 50-year mortgage sounds like it would be a very poor financial decision and is certainly not one that I would ever make for my family. As the article states:

Prime candidates for 50-year mortgages would be professionals who don’t have the current income to qualify for their dream homes but are anticipating significant increases in their earnings over the next few years. A longer loan, where buyers are paying mostly interest, allows them to get the house now, then take out a more traditional loan when their income goes up later.

This quote from the article just screams to me that this is for people living above their means and making purchases that they truly cannot afford. What happens if that anticipated increase in income never materializes? Or what happens if the housing market turns south and the value of the home declines? In my opinion, this mortgage product is for people that want to push the envelope of being house rich and cash poor while running a serious risk of financial ruin.

Do you agree with me that the 50-year mortgage is a ridiculous possibility? Or do you see any validity to using this product to leverage your financial situation?

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