Housing Trends: The Fifty Year Loan

Just when You Thought Housing was a Major Problem, a New "Solution" Makes Things Worse

In the face of ever-spiraling housing costs, some banks in the UK now offer mortgage loans up to fifty-two years. Even the federal Fannie Mae foundation in the US permits housing loans up to forty years, and California recently begun selling fifty year mortgages.

There are times when a protracted mortgage may be appropriate. Extending housing loans another ten years does reduce the amount of monthly payments, albeit only marginally. The payment (principle and interest only) drops by approximately seven percent per month, based on a loan of $200,000 at seven percent interest. If a buyer won't be holding onto the property for very long, and can sell at a good profit, it's a worthwhile deal. A buyer can afford more house for the money than they could otherwise purchase.

As a buyer's credit score declines and the housing interest rate rises, however, the margin of savings narrows. It takes a thirty-percent interest rate before a forty-year mortgage payment actually exceeds a thirty-year monthly installment.

When it comes down to it, though, the per-payment level is only the tip of the iceberg, regardless of credit score.

The Big Picture Packs a Wallop

Taking that same seven percent loan rate and a $200,000 loan, the thirty-year monthly payment is $1330.60 per month (principle and interest only.) The forty-year installment is $1242.86.

At thirty years, you're paying a total of three hundred sixty payments. Forty years bumps that up to four hundred eighty. The math from there is simple - and enough to make the average worker choke.

360 x $1330.60 = $479,016.00
480 x $1242.86 = $596,572.80

That's a difference of $117,556.80, and an extra decade of mortgage.

The Forever Payment

Following the lead of the United Kingdom, California has debuted a fifty-year housing loan here in the US. Taking that same $200,000 mortgage at seven percent interest and extending the loan to fifty years brings the monthly costs to $1203.38. Over the course of the loan, the cumulative payments add up to a whopping $722,028.00.