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50-year mortgage gains momentum |
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In an effort to help buyers qualify for ever-spiraling home prices, some mortgage lenders have stretched the life of a loan out to 50 years.
They are also touting them as an alternative to interestonly loans, for which buyers pay none of the principle for the first couple years.
Alex Diaz Jr., vice president of Statewide Bancorp in Rancho Cucamonga, said the 50-year mortgage has particular appeal in California because prices are higher than the rest of the country.
"The 30-year fixed mortgage is great, but with gas prices so high, people we're dealing with are concerned about making prices work, and the 50-year is something they're starting to consider," said Diaz.
The average sales price for an existing home in the High Desert was $332,352 in April, a leap of 208 percent over five years. And in California as a whole, the median home price has passed the half-million mark.
Diaz said interest is strong in San Bernardino county, including the High Desert.
Liz McGiffin, a partner at High Sierra Mortgage in Victorville, said the product has appeal because people want to build equity in their homes.
"The words 'interest only' are scaring people," she said. "By not paying any money on their principle, they've got to be careful of the value of their homes coming down."
Ro ger Schlesinger, also known as the "mortgage minute guy," said 50-year loans don't have any value.
With a $300,000 loan at 6.5 percent interest, the payment would be $1,890 on a 30-year loan, he said. With a 50-year loan, the payment would be $1,684, and with an interest-only loan, $1,625.
"It's really no different," he said. "You might as well say, 'I'm going interest-only.' "
The similarity between 50-year loans and interest-only loans is not lost on Diaz.
"They're pretty much identical," he said, except for one thing: with 50-year loans, you pay into your principle — but not by much.
Using Schlesinger's example, in five years a buyer would only pay $4,605 into a $300,000 home after shelling out $101,000.
"You could probably just do better by investing it," Schlesinger said.
But Diaz said the point is not to hold on to the house for 50 years. Rather, the 50-year loan gives buyers the chance to pay a lower monthly payment, then refinance or sell — just as they would do in an interest-only situation.
The only difference is buyers can hedge against the possibility that home values go down, which would cause people to owe more than the home is worth if they had gotten into an interest-only loan.
"If they're not paying any toward the principle, and they have to refinance, they're going to be upside down," said McGiffin.
Schlesinger continues to be bullish on interest-only loans because he doesn't think prices will be coming down anytime soon — with strong population growth and a weak dollar drawing foreign investors to buy second homes in California.
"They say if you pay interestonly and you never pay it down, where's your future?" he asked. "Your future is that most people get rich in real estate by the houses appreciating, not by them paying it off."
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