Why can’t we have 50-year mortgages?
I got a question this week from a woman who asked, “Why can’t banks give people 50 year mortgages?” Her logic is that the payment would be lower because it is spread over 50 years compared to 15 or 30 years. In addition, most people don’t pay off their mortgage anyway so why not lower the payment and allow people to pay for a longer time until they decide to sell.
Well after some thought and some research I found out why banks and other lending institutions usually don’t make 50-year loans and what the problem would be with issuing such a loan. The first problem is that most banks do not hold their loans. In other words, most banks sell their loans to Wall Street investors or they sell the loans to the government’s Fannie Mae loan program. Therefore, while you may start a loan with ABC mortgage, it will probably end up with XYZ loans owning your loan. Since the banks are selling the loan, they want to make the loan as marketable as possible. They want to make sure that once they make the loan, they can sell it quickly without giving much discount. In order to do that they must make the loan just like everyone else’s loan who is selling a loan. There is not an active secondary market for 50-year mortgages.
Having said that I have found some banks that do offer a 50-year mortgage. It is a relatively new product and it is in response to people wanting lower payments. The biggest advantage to this loan is the lower payment. The disadvantages are higher interest rates and it takes much longer to earn equity in your home. A few banks are toying with the idea and they understand that unless a 50-year mortgage becomes the norm they will have to keep this loan on their books. The other negative of this loan is that using this type of financing, we are creating a generation that will not believe in debt free living. In other words, you will spend your entire adult life in debt. This is bad thinking and could ultimately hurt our economy even more.
Therefore, before you think about asking around for a 50-year mortgage I would suggest you look at buying less house. Is it worth going into 50 years of debt just so someone can see you in a bigger house? I don’t think so. Also, let’s not forget that although you have a lower payment you still will have higher bills because the home that you buy will be larger and cost more to maintain. In my opinion, this is just another way to give people something even if they cannot afford it. Isn’t that what got us into this mess in the first place?
Until next week…
Arthur V. Veal IV is the owner of We Buy Houses Home Services, a real estate investment company. They specialize in selling houses with owner financing. They have sold hundreds of houses to deserving families that were not able to get bank loans at the time. Find out more about their programs by visiting www.ownwithnobank.com
