Straight Talk About Real Estate

We traditionally think of mortgage loans as being a 30-year or 15-year loan. If you make your mortgage payment every month, after 30 years or 15 years, you will own your home free and clear.

With rising home prices, buyers need loans that allow the lowest monthly payment possible. Lenders responded by offering adjustable rates, interest-only payments, and fixed-payment options.

Then we saw the 40-year loan option. Of course if you stretch out your payments over 40 instead of 30 years, your monthly payments are lower.

Now, we are seeing the 50-year loan, extending the loan period even longer, thus offering a lower monthly payment. Is this a good option?

If all you care about is having low monthly payments, a 50-year loan will give you that. Beware that most of what you pay is interest. Very little principle is paid down each month. Your loan balance decreases just a few dollars with each payment. Over the life of the loan, you are paying much more interest overall. This is also true of an interest-payment only plan. If real estate goes down, you may end up owing more than the value of your house. Of course this is true of any type of loan. But more so with a longer term loan since you are not building much equity with each payment.

Given the fact that hardly anyone stays in their house long enough to pay off the loan entirely, I do not object to a longer loan term, just as long as you realize the implications stated above.