Should CUs Jump On 50-Year Mortgage Bandwagon?
The newest breed of "exotic" mortgages are 50-year mortgages, but the jury's still out on whether it makes sense for credit unions to jump on this latest mortgage bandwagon.
Born of increasingly unaffordable homes, particularly in the California market, the 50-year mortgage is ostensibly designed to get more people into a home. But there is a price.
"It doesn't amortize the way a regular mortgage does, you're not going to be able to build meaningful equity in the home," said Steve Ornstein, partner at Thacher Proffitt law firm. "It's a way to get someone's feet wet. You lengthen the term to lower the monthly payment to give people access to housing. But the beauty of the 30-year fixed mortgage is that after the first few years of paying off interest, you start to see real amortization, and eventually you own the house free and clear. With the 50-year mortgage, unless the home has tremendous appreciation, you're not going to see that."
Mortgage Outlives The Borrower
Some would-be homeowners interested in the 50-year mortgage might not live long enough to pay off the house-much less spend all 50 of those years in that same home.
"How many people stay in a home for 50 years? For that matter, how many people stay in a home for 30 years," asked Jeff Taylor, an economist for NAFCU. "I would assume that anyone getting into a 50-year mortgage is planning to sell the house and move, or at least, let's hope so, because no one is doing 50-year fixed. These are adjustable. And imagine the hundreds of thousands of dollars you are paying in interest on this kind of loan. It's bad enough when you calculate that out for a 30-year mortgage."
But some lenders are touting the 50-year mortgage as a way to lower payments and help someone get into that first house. It can be a tantalizing draw, even when those payments aren't that much lower.
For a $200,000 house loaned at 6% APR, the payment on a 30-year term would be $1,199.10, compared to $1,100.43 for a 40-year loan and $1,052.81 for a 50-year loan, according to CUNA Economist Steve Rick.
"It really doesn't lower those payments all that much," Rick observed. But it still may just be enough, Taylor suggested.
"Saving $100 a month may not sound like a whole lot, but a lot of budgets today are at that level where saving even just $100 a month makes a big difference," Taylor offered. "Particularly when it costs you $50 just to fill your gas tank. Suddenly, saving $100 a month means two more times that you can fill up your tank."
For some lenders, however, offering a 50-year mortgage is about remaining competitive in a shrinking market.
"If your competition is offering this product, you risk losing that business to the mortgage broker down the street," Rick noted.
"We are already seeing major shrinkage in the mortgage industry, and that is what's driving this. They are having to get more aggressive to try to squeeze out more business. I wouldn't be surprised to see a proliferation of 50-year mortgages and other products."
But "everybody's doing it" is not necessarily a reason for credit unions to offer these products, Taylor and Rick agreed.
"My feeling is that the 50-year mortgage does not provide much benefit to the member," Rick offered, noting that he sits on the board of a credit union in Wisconsin that recently started offering a 40-year mortgage. "It's had some desirability, but there hasn't been that much demand. Overall, it just doesn't offer major benefit to the member. It just stretches out the payments. You're often better off going with a more traditional adjustable rate product."
And it's not just the member's well being that Rick is concerned about.
"If you're offering a 50-year mortgage, you are assuming the interest rate risk for 50 years, theoretically, if someone were to actually hold the loan for the full term. That's a huge interest rate risk."
Freddie Not Buying
And don't expect Freddie Mac to take those mortgages off your hands-at least not yet, according to Brad German, a spokesman for the government-sponsored enterprise. "We're still in the process of rolling out our full suite of 40-year products," he noted.
Plus, Rick suggested that consumers interested in the 50-year mortgage likely have slightly higher credit risk. "It's a self-selecting group," he noted. "The people least able to afford it are opting for this type of loan."
Taylor agreed. "I don't think the typical credit union member is going to use this. As it is, I don't think we have all that many offering the 40-year mortgage," he said. "I just don't know that the 50-year mortgage is going to fly."
Even so, Taylor added, "I wouldn't be surprised if some credit unions are thinking about it. You look at the houses in some of these markets, and you're talking about a half-million-dollar house...even if you make good money, geez, it's tough."
HOW LONGER TERM MORTGAGES COMPARE
Assuming a $200,000 Mortgage at an APR of 6%, in first year of the loan
TERM PAYMENT AMOUNT TO INTEREST AMOUNT TO PRINCIPAL
30-yr $1,199.10 $1,000 $199.10
40-yr $1,100.43 $1,000 $100.43
50-yr $1,052.81 $1,000 $52.81