Lifetime Mortgages
There are a number of things that have to be resolved before someone buys a home. The ability to pay for it is chief among them.
You get better terms if you are a good risk; stable job, monthly mortgage payment that can easily be paid, track record of paying things off.
But without those basic items, it’s hard to get a loan with decent terms, if you can even get one at all.
That’s why some in the administration, with the president’s blessing, are floating the idea of 40 or 50-year mortgages, as opposed to the current maximum of 30 years. The idea is that if you amortize the payments over an additional 10 or 20 years, the monthly payment will be lower and more people can then be able to purchase a home.
Keep in mind that the purchase price and monthly payment is just the beginning of the costs of home ownership—taxes, furniture, repairs, etc., all take another huge bite out of your wallet. But this idea would in theory stimulate the housing market and everything that goes with it.
However, that may not be a good thing if it sets people up for a lifetime of debt. Folks who get a 30-year mortgage are usually encouraged to pay additional on the principal to pay it off sooner, making it cheaper overall because you are paying less interest. The banks don’t encourage that, but financial counselors do. And the feeling one gets at retiring a mortgage, thereby meaning you own your home and no one can take it from you, is hard to beat.
But if you are someone in your mid-20s and purchase a house with a 50-year mortgage, if you play it strictly by the payment book, you won’t have that place paid off until you have retired…and you’re carrying that debt into retirement with fixed income. That’s a pretty daunting future.
These days, there are lots of folks who carry mortgages their entire life, into retirement. For them, bumping from a 30-year to a 50-year mortgage doesn’t matter because they never plan to pay it off anyway. But that didn’t used to be the recommended way to preserve your assets.
A number of analysts have crunched the numbers, and extending the mortgage from 30 to 50 years could double the dollar amount of interest paid, and significantly slow the equity you would build in the house.
All reasonable ideas should be considered, of course…but adding hundreds of thousands of dollars to the lifetime cost of a house may fix one problem, but lead to many more.
