40- and 50-year loans don't make sense

Hand signing mortgage next to house

You should think very long and very hard before taking out a 40-year loan to buy a house.

And those 50-year loans some lenders began offering last year?

Don't do it. Ever.

We know that's harsh. But if we don't tell you, who will?

We feel your pain, particularly if you live along much of the east and west coasts where home prices can be astronomical. How does a middle-class family without the cash for a big down payment afford a home in Orange County, California, where the median price for a single-family house has grown from $487,000 in 2003 to $700,000 today?

But the extra 10 or 20 years won't reduce your monthly payments all that much. And you'll pay so much interest to the bank, and your equity will grow so slowly, that your home will never be a good investment, helping you to save and build wealth.

Just look at how much more it costs to borrow $100,000 and pay it back over 40 or 50 years, instead of the traditional 15 or 30 years.

We'll begin with a basic fact about the mortgage business: The longer the loan, the higher the interest rate. Why? Because 40- or 50-year loans are riskier and lenders have to wait longer to be repaid.

With good credit and a suitable down payment, you could probably get a $100,000 mortgage for 15 years at 6.5%. That same loan over 30 years would probably cost you 6.75%. For 40 years, it would be 7%.

Here's what your monthly payment would be for interest and the principal -- taxes, insurance or any fees or assessments are extra -- and the total amount you'd pay in interest over the life of the loan:

There is a certain amount of industry speculation about 50-year mortgages. If they do become common, no one knows for sure what sort of interest they will require.

If they were a quarter-point higher than a 40-year loan, the monthly payment on $100,000 would be $621 -- the same as with the 40-year loan. If you get down to counting pennies, the 50-year would cost 46 cents more per month.

Even if you could get a 50-year loan at the same interest rate as a 40-year loan, or 6.5%, the monthly payment would be $601.69, for a savings of only $19.74 a month.

So, while the difference between a 15- and a 30-year loan is a significant $222 a month, the difference between the monthly payments on a 30- and a 40-year mortgage is only $28 ... and we'll ignore the 50-year loan.

"How much is the payment?" is invariably the first thing a prospective borrower will ask, but another important question is, "How much paid equity are you getting for your money?" In other words, at the end of the first year, how much of the home is yours? How about after the fifth year?

Most homes do increase in value, but it is impossible to predict either how much or how fast. You do know, however, how much you reduce the principal every month by making payments. After one year you would have:

Not building equity in your home is particularly important because home prices are leveling off or even falling in many cities. A First American Corp. study cited in a recent Wall Street Journal found that "29% of borrowers who took out mortgages last year have no equity in their homes or owe more than their house is worth." That's up from 10.6% of borrowers in 2004 and an alarming trend.

The difference is even more striking after five years, when you'd have:

There are many emotional and personal reasons for buying a house. But financial considerations should play a big part in the decision, too.

A home should become your foundation for building wealth. When the numbers add up, a home should quickly become one of the most valuable things you own. The equity you create by paying off the loan is a type of savings that you can use to send your kids to college or ensure a comfortable retirement.

The numbers don't add up for 40- and 50-year loans. You don't build wealth because you have to give far too much of what should be your money to the bank. And then it becomes their money.

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