Ironically, 50-year Mortgages Are A Short-Term Borrowing Solution

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The Chicago Tribune's Mary Umberger wrote an interesting piece on the lengthening of mortgage terms, from 30-years to 40-years and now to 50-years.  It ran in Sunday's Business section on the front page.

Mary talked to me as a part of her research on 50-year mortgage story, about which I said:

Dan Green, a mortgage planner with Mobium Mortgage Group in Chicago ... said some of those credit-impaired borrowers might be good candidates for the 50s.

The borrowers would use the ARM to leverage the equity from their homes to pay off debt and improve their credit scores--then refinance out of the 50-year loan to something with better terms.

"It's ironic that the longest available amortized loan is really a short-term solution for some people," Green said.

Her article highlighted some of the lenders that offer the product, while noting in the same breath that Wall Street is not showing much of an appetite to buy them. 

50-year loans carry relatively high interest rates and, therefore, are a short-term solution for people whose credit scores are too low to qualify for interest only loans, but are still in need of a low mortgage payment. 

Typically, that includes the 13 percent of the U.S. population whose credit scores are in the range of 500-579.

By spreading out payments over 50 years, a homeowner can reduce his monthly payments to the lowest level possible while working to improve their credit score. 

Once the credit score improves, the homeowner can remortgage into a more appropriate, lower interest rate home loans that better match their long- and short-term financial goals. In this sense, the 50-year mortgage is the first step of a two-step mortgage plan.

I don't often agree with the Tribune columnists, but kudos to Mary for a deep dig into the story of the 50-year mortgage and recognizing its application as a short-term mortgage solution. 

Too often, columnists deride 40- and 50-year loans without understanding how the mortgage can be properly applied to person's financial goals.

I can't blame the columnists because they are not "in the market" everyday to see what is developing, and how to use it.  Even the venerable Jack Guttentag showed his ignorance about 50-year mortgages, stating, "They're asinine".  His take is that interest only loans are preferred to "going out beyond 30 years". 

He's right, but some people just don't qualify for interest only mortgage products and need the 40- or 50-year term.

Source
Long Way to Go For 50-Year Mortgages
Mary Umberger, Chicago Tribune
July 30, 2006

http://www.chicagotribune.com/business/chi-0607300068jul30,1,7997390.story?coll=chi-business-hed