It happened again. 

This time, the dreaded (and oft-repeated) quote found its way into the front page of the Tribune's New Homes section.

In discussing the benefits of a 50-year mortgage as opposed to an Interest Only mortgage, a home buyer is quoted as saying:

"A big part of selecting a 50-year mortgage is the payment size.  I also know that in a few years, I will have some equity."

This logic is flawed on three levels:

Flaw #1: Interest only mortgages are called "interest only" because the payment due each month that consists of the only the interest due on the loan. Often overlooked, is that additional payments towards principal can be made at any time.  Home owners using interest only home loans can make principal payments at any time, and, in effect, "build equity".

Flaw #2: A 50-year mortgages carries a higher mortgage rate than a comparable Interest Only home loan.  Therefore, the 50-year mortgage carries a higher cost of borrowing.  The better choice is to choose the interest only mortgage, but make the mortgage payments as if it was the 50-year schedule all along.  The mortgage balance will pay down faster.  This method accelerates "equity growth".

Flaw #3: The 50-year mortgage is not a 50-year fixed mortgage -- it's an ARM that only offers lock periods for 2 years, 3 years, or 5 years.  After the initial fixed period, the rate adjusts and the payment will likely increase.  "50 years" only refers to the amortization period of the loan.

Now, this logic is irrelevant for some homeowners because not everyone will qualify for interest only mortgage payments.  For those that don't, there may be no mortgage options other than a 50-year program.  In that sense, 50-year mortgage can be "low-payment loans of last resort".

But for homeowners that can get approved on interest only payment, there are three huge benefits to doing so:

1. Interest only mortgages carry lower rates than 50-year mortgages
2. Interest only mortgages carry lower payments than 50-year mortgages
3. Interest only mortgages allow "extra" principal payments to be made at any time so the homeowner can self-manage it as a 50-year mortgage, if desired

Yes, the 50-year mortgage has its place, but it's mostly as a gimmick for mortgage lender marketing.  The better value for homeowners is to choose interest only mortgage products instead.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.