The Dangers of a 50-Year Mortgage
Minimal Monthly Savings and Debt That Lasts Past Retirement
Oct 16, 2009
As people begin to live longer, new mortgage products come out not only to reflect customers' longevity, but the lifestyles they have taken on.
The newest addition on the loan market to accentuate a lifestyle that includes lifelong debt is the 50-year home mortgage. While financial experts like Dave Ramsey are trying to encourage people to utilize 15-year home loans, lenders are more than eager to sell products lasting two and three times as long so as to make more money over many more decades.
Comparing the 50-year Home Loan to a 30-year Mortgage
If a home owner was able to find extremely favorable loan rates of 4.5% on a 50-year home loan of $150,000, she would be obligated to pay $630 every month in principal and interest. Over the course of 50 years, she would pay $227,000 in interest, making the entire loan cost $377,000.
A 30-year home loan at the same rate would cost $760 every month. Over the span of 30 years, the home owner would have paid $124,000 in interest, bringing the total cost of the loan to be $274,000. The savings is more than $100,000 in interest.
But the $103,000 in interest saved is not the entire savings. Rather than paying $630 every month into an interest bearing loan, home owners can invest that same amount into an interest bearing account.
The Difference of Retiring With a 30-year Loan
After the 30-year mortgage is paid off, $630 can be placed into a retirement account, or that of a trust for heirs, charities, or one's alma mater.
If $630 was placed into an account gaining modest earnings of 3% over 20 years, the account would grow to $209,000. Rather than spending that money paying 4.5% interest to a bank, a person could set up a suitable retirement that would allow them to likely stay in their home.
On the other hand, it that money only went to pay on a loan from decades before, then other money would be needed to fund one's retirement. Other options would include selling the home that was paid for with so many hard earned dollars, or taking out a reverse mortgage to stay in the house without owning it anymore.
While one option may be right for one person and not for another, the 30-year loan for $130 more each month would lead to a savings on interest of over $100,000. When the remaining money that would have gone to monthly mortgage payments is invested instead of being paid to a bank, the net gain exceeds $300,000!
This money can be used to fund one's retirement, leave healthy inheritances to loved ones, or support worthy organizations. In the end, paying off a 30-year home loan is far superior to having a 50-year loan that may exceed the borrower's lifetime.
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