50 Year Mortgages: Low Payments at a Price
50-year mortgages are loans scheduled to be paid off over 50 years. Because the loan term is so long, monthly payments are very low relative to other loans. 50-year mortgages are just used as a cash flow tool and are almost never paid off over 50 years. Let’s get into detail about how 50-year mortgages work and whether or not they’re right for you.
Basics of 50 Year Mortgages
Most 50 year mortgages are fixed-rate mortgages. They are built so that you pay off the loan over 50 years. This is relatively long since most mortgages are 15 or 30-year mortgages. Even if you don’t actually keep a 50-year mortgage for 50 years, the loan is designed with a 50-year timeframe in mind. It's hard to find home loans that are designed with a 50 year time horizon (or longer).
Why Use a 50 Year Loan
Most people choose a 50-year mortgage for the low monthly payment. If you use a 15 or 30-year mortgage, your monthly payment will be higher. By stretching out the loan, monthly payments decrease dramatically.
You can fiddle with a mortgage calculator to see for yourself how this works. Change the time frame from 15 to 30 to 50 years and watch how the monthly payment changes.
Problems with 50 Year Mortgages
While lower monthly payments may be attractive, there are always tradeoffs. Using a 50-year mortgage means you’ll pay more in interest and you’ll build equity extremely slowly. By using one of the calculators in the link above (or a generic loan amortization calculator) you’ll see how the total interest costs are much higher with a 50-year mortgage.
It’s not just the longer time frame that increases interest costs. 50-year mortgages also come with higher interest rates. Expect to pay an extra .25% or more than you would on a 30-year mortgage.
Paying Down Loans: Amortization
When we talk about mortgages, such as 30-year mortgages or 50-year mortgages, we’re talking about how long it will take to pay the loan off. With each monthly payment, you pay some interest and you repay part of the loan balance. With a 50-year mortgage, your final payment in year 50 will completely pay off the loan.
The process of paying down a loan is called 'amortization'.
When you change some part of a loan (the interest rate or length of time to repay it, for example), you change how quickly it will amortize. By lengthening the time frame, the loan amortizes more slowly.
Alternatives to 50 Year Mortgages
A 50-year mortgage might be perfect for you. If you do your homework and work closely with your lender, you may decide that it’s the best option. However, you should consider some alternatives and rule them out before moving forward.
Depending on your goals and your credit, interest only loans might accomplish something similar to a 50-year mortgage. You might have more luck finding an interest only loan or a 50-year mortgage depending on the marketplace. See what the banks are offering before making a decision.
You should also consider borrowing less and using a shorter term loan. If you’re stretching to buy more than you should, it’s easier to get in trouble later.