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A 50-year mortgage is just too much of a stretch
By Chuck Jaffe, MarketWatch
Last Update: 10:34 AM ET May 12, 2006


BOSTON (MarketWatch) -- Take the worst problems of one stupid investment
and mix it with the biggest concerns of another and you wind up with a
Stupid Investment of the Week to the second power.
And that's precisely what you will get if you fall for a 50-year
mortgage, a relatively new product that is starting to make in-roads in
the mortgage market, particularly in hot real estate markets like
California.
Stupid Investment of the Week highlights the problems that make an
investment less than ideal for the average consumer, in the hope that
pointing out trouble spots in one situation will make them easier to
find elsewhere. While obviously not a purchase recommendation, neither
is this column meant to be an automatic sell signal, as there are times
when getting out of a worrisome situation simply compounds the problem.
In the case of the 50-year mortgage, consumers who have already taken
one may fall into the group for which the product may serve a real
purpose; more likely, however, they will want to look carefully for the
right time to refinance and make a change.
To see why, you need to understand the 50-year mortgage products
currently being offered and how they differ from other products on the
market.
The 50-year deals are relatively new, created in the aftermath of the
government's decision to resume sales of 30-year Treasury bonds, which
started up in early February. The new products are a direct shot fired
by some savvy marketers to fit between two other mortgage products that
are growing in popularity, the interest-only loan and the 40-year
mortgage. Variations of both have been previous picks for Stupid
Investment of the Week, but neither is as heinous for the average
consumer as the half-century package. See previous Chuck Jaffe on
interest-only loans. Read previous column on the 40-year mortgage.
Both of those products are designed to help consumers get more house.
Stretching out the time frame on a traditional fixed-rate mortgage to 40
years lowers payments, allowing the consumer to buy more house and then
accrue equity in the house over the (very) long haul. Interest-only
deals also lower payments, but without the benefit of building equity
during any time frame where no principal payments are being made.
The current 50-year deals are not fixed-rate loans, but rather
adjustable deals that carry their introductory rate for five or seven
years, and which then could have the rate move up or down for decades to
come.
Few can benefit
Anthony Hsieh, president of LendingTree.com, said in a recent statement
about the new 50-year deals that "mortgage lenders are getting craftier
with their product offerings to get the attention of consumers."
He did not say that consumers always benefit from that kind of creative
thinking, and said in an interview Thursday that he doesn't think
50-year mortgages will get much traction, in part because consumers may
wake up to the idea that this is a deal borne more out of desperation
than sound financial thinking.
"If a consumer looks at a 50-year mortgage as the only way to afford
that home, to get into a hot real estate market or simply to afford the
monthly payment in a refinance, they're really not looking at the
potential problems," Hsieh says. "It's a very small portion of the
consumers who could use this the right way."
The "right way" would involve using the longer amortization schedule to
drop initial payments expecting that there will be a significant
increase in income to cover any adjustment in mortgage rates or the
costs of a refinance just a few years down the road.
But even that plan could turn out horribly wrong.
While the 50-year mortgage builds equity -- unlike the interest-only
deals -- the pace of that growth makes a snail look like a race car. The
equity appreciation for five years on a 50-year loan is less than 2%.
And while the payment is lower, it's not necessarily creating a huge
savings, because one trade-off consumers make when stretching out the
length of the deal is that they pay a higher rate.
Painted into a corner
Ultimately, that means the consumer may well be in the same financial
boat five or seven years from now, if the rate adjusts and gets ugly
enough to make refinancing a smart move. Maintaining the exposure to
interest rates -- rather than locking in a fixed rate -- counteracts the
steps the consumer is taking to get an affordable payment now.
Barring some sort of windfall, a big increase in income or tremendous
price appreciation, the homeowner will still have a tough time affording
a new mortgage. And if the value of homes in the area has shrunk during
that period, the consumer easily could be underwater on the loan.
"It may work to purchase a home with one of these instruments at a time
when you expect property values to keep rising and interest rates to
remain steady," says Stuart Gabriel, director of the Lusk Center for
Real Estate at the University of Southern California, "but if you
believe that the path of home prices might change -- in the near- or
midterm -- you probably want to be cautious in your behavior and stick
with something more traditional."
Hsieh was among several experts to note that there has been a shift in
focus for homeowners and buyers in the last five years, to where the key
question for many is "What is my monthly payment, and what can I do to
lower it so I can manage my cash-flow better or spend more cash on other
things."
While a 50-year deal might seem like the only way to buy into a great
neighborhood or hot market, consumers need to remember that someday,
somehow they will actually have to pay for the loan and that failing
that, they will add to the national statistics showing foreclosures on
the rise.
Says Gerri Detweiler, author of "The Ultimate Credit Handbook:" "If you
can't afford a 30-year fixed mortgage, maybe you should reconsider
whether you're really living or buying in the right neighborhood. ...
You may not want to settle for something less, but that's all you can
really afford."
Chuck Jaffe is a senior MarketWatch columnist. His work appears in
dozens of U.S. newspapers.