Cash-strapped home buyers turn to 50-year mortgages

The rare mortgages spread your payments out longer, but some experts aren't sold on them.
By Jim Buchta
Staff Writer

Published: June 10, 2006
Edition: METRO
Section: NEWS
Page#: 1A

When Larisa Meyer, a self-employed graphic artist, decided to buy a house in south Minneapolis, she shopped for a mortgage that would keep her monthly payments as low as possible but still pay down some of the principal.

She signed up for a new 50-year mortgage.

While the thought of making house payments for a half-century is enough to send some prospective borrowers to the rental want ads, some lenders say that rising mortgage interest rates and high home prices are forcing more buyers to embrace unconventional and sometimes risky mortgages.

Borrowers have lots of options. As the housing market cools and the refinancing boom dries up, lenders are working hard to woo new borrowers with unusual loans.

Among the newest are the 40-year and 50-year mortgages.

"The choices of mortgages have exploded during the last five years, and this is just another one that fills a niche," said Eric Pirius, the River City Mortgage lender who represented Meyer.

To be sure, 40- and 50-year mortgages represent only a tiny fraction of all mortgage originations every year, and the variety of options means that it's very unlikely that they'll ever become the new standard. Pirius said that so far this year, his company has originated only 20 to 30 such mortgages.

"There's so much competition now among lenders that you keep finding boutique products for smaller and smaller needs, so that's just another part of that trend," he said.

Technically, most 50-year mortgages are adjustable-rate mortgages with rates that reset after three to five years with payments amortized over 50 years. Some even include a 30-year balloon payment, when the entire mortgage must be paid off. These mortgages are often called "50 due in 30."

Most of the longer-term loans are subprime mortgages tailored to borrowers who want the lowest possible payment, but can't qualify for an interest-only mortgage because of low income or credit scores. Such subprime loans come with higher interest rates that compensate lenders for the higher risk.

Conventional wisdom holds that when interest rates are historically low, which they still are right now, it makes sense to lock in a longer-term, fixed-rate mortgage. Many borrowers, however, have opted instead for shorter term, adjustable-rate mortgages that have a lower initial rate and thus lower monthly payments. The theory is that most borrowers will move or refinance their mortgage long before their rate will adjust or their balloon payment will come due.

Kris Wilson, a mortgage banker at Summit Mortgage in Bloomington, said that while she could offer 50-year mortgages, she prefers interest-only mortgages, ARMs and special programs that guarantee a lower rate for special-needs borrowers.

Nonetheless, she understands why borrowers are seduced by the prospect of spreading their payments over 600 months.

"People are finding it harder and harder to qualify for their mortgages," she said. "I've been seeing a lot of people who are credit-challenged, who have student loan debt that is higher than you'd like it and are strapped with credit card bills and car payments."

Wilson said more borrowers are having trouble qualifying for conventional mortgage products or are stretching to buy more house than they can really afford.

"Wage acceleration has been fairly flat and house prices have increased significantly, and now you throw gas prices into the equation - it's really starting to squeeze some middle-class families," she said.

Interest-only loans are hot

Wilson and others say that interest-only mortgages, which let borrowers pay only the interest payment and no principal, are the favorite among those who want the lowest payment possible. That's because they carry a lower interest rate, but don't prevent borrowers from paying down the principal if they choose.

For example, consider a 30-year fixed-rate mortgage for $200,000 with a rate of 6.75 percent and interest-only payments for 15 years, which would cost $1,125 a month, according to Dan Hughes, Summit branch manager.

On the other hand, a "50 due in 30" mortgage for the same amount at the higher subprime rate of 7.5 percent would cost $1,280 a month.

That's a difference of $155, but borrowers need a higher credit score to qualify for the interest-only mortgage.

Just two years ago short-term mortgages were all the rage, because mortgage rates were at 50-year lows and borrowers could get a 15-year or shorter term adjustable-rate mortgage with a lower payment than longer-term fixed-rate mortgages. Today, however, home prices have risen by double digits in some areas and interest rates are more than a full percentage point higher, so short-term mortgages don't make quite so much sense.

Total mortgage originations are expected to drop by 25 percent this year, according to a recent report by Freddie

Mac. That's dire news for lenders, who will continue to look for innovative ways to lure customers, including some who are already living on the edge.

"I think that's what's happening, especially among subprime investors who will pull tricks out of their hats in order to help people get into houses they really can't afford," said Kris Wilson. "And I don't think that's a good idea."

.15, 30, 40 or 50?

Fifty-year mortgages typically come with higher, adjustable interest rates for people with what mortgage banker Gary Lind of Summit Mortgage calls "bumped or bruised credit." Lind hasn't had any clients taking 50-year mortgages.

.Here's what payments on a $180,000 loan might look like:

.Mortgage duration Interest rate Mo. payment

15-year 7.625% $1,681.44
30-year 7.7% $1,283.33
40-year 7.825% $1,227.98
50-year 7.950% $1,215.63

.(Monthly payments fall even at higher rates because borrowers stretch payments over much longer periods.)

. - Star Tribune research