by
Carl Hampton
08/04/2006
With hotspots like Las Vegas, much of
California and Florida still enjoying a good
real estate market, many banks and mortgage
companies are now spreading out payments
over 50 years to make them more affordable.
Prior to these 50-year mortgages,
interest-only mortgages were promoted and
sold as the way to go. The real question
here is which is better?
Let’s first digress on what an
interest-only mortgage is. Interest-only
home loans or mortgages aren’t as a
general rule permanently interest-only. The
bank or mortgage company will normally offer
the borrower 2 to 5 years at interest-only;
after that they must start paying off the
principle. During this time, the principle
has grown. A great many borrowers may find
themselves unable to pay the higher payments
that come at the end of this interest-only
period. In this case, interest-only loans
are similar to ARMs, and have similar
default and foreclosure rates (higher than
for regular fixed mortgages where the
payment stays the same throughout).
The 50-year mortgage simply spreads your
payments out over a longer time period and
greatly increases the amount of interest you
will payback; this also tends to reduce your
build-up of equity. Alex Diaz Jr., Vice
President of Statewide Bancorp in Rancho
Cucamonga, stated that “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 mortgage
is something they're starting to
consider." The real estate market has
grown by leaps and bounds in California with
the average home selling in excess of
$300,000.
The 50-year mortgage was designed to do
three things. First, it makes it much easier
for someone to buy a home in these high
price areas. Second, it can help buffer and
insulate the borrower against a housing
bubble or possible localized deflation.
Third, it keeps the selling prices high.
However, many so-called real estate experts
will tell you that the interest-only loan
does the same thing, but does it? The main
problem with the interest-only loan is that
it does not insulate or offer any protection
for the borrower from increasing principle,
negative equity (which can happen should
there be a drop in housing prices), and, of
course, those increasing payments when the
term you agreed is over.
Keeping this in mind, plus the fact that
there is only a very minor difference in
initial payments (payments over the
interest-only period), clearly the 50-year
mortgage should be a better way to go.
If your budget allows, a good tactic to use
is to make bi-monthly payments which will
reduce the interest and term of the loan
saving you many thousands of dollars. There
are many lenders out there now offering this
option to their borrowers. As they say, the
real money in real estate is made from
buying low and selling high.
The problem is that in most of these hot
communities, the selling price often ends up
being much higher than the asking price,
plus houses do not stay on the market for
very long at all. So, buying low is normally
out of the question. Just try finding a
bargain foreclosure or HUD homes for sale in
California, it's a little like trying to
find gold in the old days. In these hot
communities, the real money is made by
buying and holding for a number of years
allowing for the yearly increases and
returns on additions and upgrades. Money can
be made for sure, but with a uncertain
future. It is really best to have a payment
program set in stone – always use a fixed
term and rate mortgage. You can still sell
in five years or less, make money, and have
the added comfort of a fixed payment.
