When most of us think of science fiction, we may imagine life on other planets or animals forming governments. When bankers engage the science fiction gears of their brains, though, they may be thinking of ... 50-year mortgages.
You read that right. Our friends at the Treasury Department are once again selling 30-year bonds, leading experts to expect more 40-year mortgages ahead. (This is because long-term loans are generally tied to some correspondingly long-term interest rate.) Some even imagine 50-year mortgages. If you suddenly find yourself intrigued, first consider the pros and cons of such an instrument.
On the plus side, longer mortgages offer lower payments to borrowers. If you want to borrow $200,000 to buy a house, a 15-year fixed-rate mortgage at 6% will mean monthly payments of $1,688. Hike that mortgage up to 30 years, and the payment drops considerably, to $1,200. Of course, longer terms generally mean higher rates, so at 6.25%, the monthly amount would be closer to $1,230, a big difference. This is why so many people opt for 30-year terms -- because it's the only way they can buy their way into a home, or at least the home they want.
On the minus side, longer mortgages mean you pay a heck of a lot more in interest over the term of the loan, and you build up equity very slowly. With a 50-year mortgage, if you buy your home when you're 40, it may well outlive you. Even if you're alive, trying to perform the traditional mortgage-burning ceremony upon your last payment may result in an explosion caused by your oxygen tank.
So what should you do? Well, if there's no other way for you to afford a home, or the home that you simply must buy, then consider a long-term mortgage. There are already some 40-year loans in existence. But plan to refinance into a short-term loan as soon as you can so that you can build more equity.
Also ask yourself whether there's any way you can swing a shorter-term loan, such as a 30-year one. Many times, the difference in monthly payments won't be so enormous. A 40-year $200,000 loan at 6.5% would offer payments of $1,180, just $50 less than the 30-year option described above. With some careful budgeting, you might be able to swing the shorter loan.
What will longer mortgages mean for the lending and home industries? Well, they're likely to attract more borrowers, for one thing. So revenues might rise. An Associated Press article pointed out that "Chris Low, chief economist at FTN Financial, a financial services firm, said longer-dated home loans could prevent a dramatic drop in the housing market because their lengthy payback periods would lower monthly payments at a time when interest rates for other mortgages have risen from historic lows."
If you're interested in homebuying and homeowning issues, visit our Home Center, which features lots of money-saving tips and even some special mortgage rates.
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.