Title:
Interest-Only Or
50 Year Mortgages - Do They Really Make Sense?
Word Count:
659
Summary:
With hotspots
like Las Vegas, much of California and Florida still enjoying a good real
estate market, many banks and mortgage companies are now spreading out payments
over 50 years to make them more affordable. Prior to these 50-year mortgages,
interest-only mortgages were promoted and sold as the way to go. The real
question here is which is better?
Let’s first digress on what an interest-only mortgage is. Interest-only home
loans or mortgages aren’t as a general rule pe...
Keywords:
Article Body:
With hotspots
like Las Vegas, much of California and Florida still enjoying a good real
estate market, many banks and mortgage companies are now spreading out payments
over 50 years to make them more affordable. Prior to these 50-year mortgages,
interest-only mortgages were promoted and sold as the way to go. The real
question here is which is better?
Let’s first digress on what an interest-only mortgage is. Interest-only home
loans or mortgages aren’t as a general rule permanently interest-only. The bank
or mortgage company will normally offer the borrower 2 to 5 years at
interest-only; after that they must start paying off the principle. During this
time, the principle has grown. A great many borrowers may find themselves
unable to pay the higher payments that come at the end of this interest-only
period. In this case, interest-only
loans are similar to ARMs, and have similar default and foreclosure rates
(higher than for regular fixed mortgages where the payment stays the same
throughout).
The 50-year mortgage simply spreads your payments out over a longer time period
and greatly increases the amount of interest you will payback; this also tends
to reduce your build-up of equity. Alex
Diaz Jr., Vice President of Statewide Bancorp in Rancho Cucamonga, stated that
“the 50-year mortgage has particular appeal in California because prices are
higher than the rest of the country. The 30-year fixed mortgage is great, but
with gas prices so high, people we're dealing with are concerned about making
prices work, and the 50-year mortgage is something they're starting to
consider." The real estate market
has grown by leaps and bounds in California with the average home selling in
excess of $300,000.
The 50-year mortgage was designed to do three things. First, it makes it much
easier for someone to buy a home in these high price areas. Second, it can help
buffer and insulate the borrower against a housing bubble or possible localized
deflation. Third, it keeps the selling prices high. However, many so-called real estate experts
will tell you that the interest-only loan does the same thing, but does it? The
main problem with the interest-only loan is that it does not insulate or offer
any protection for the borrower from increasing principle, negative equity
(which can happen should there be a drop in housing prices), and, of course,
those increasing payments when the term you agreed is over.
Keeping this in mind, plus the fact that there is only a very minor difference
in initial payments (payments over the interest-only period), clearly the
50-year mortgage should be a better way to go.
If your budget allows, a good tactic to use is to make bi-monthly payments
which will reduce the interest and term of the loan saving you many thousands
of dollars. There are many lenders out there now offering this option to their
borrowers. As they say, the real money
in real estate is made from buying low and selling high.
The problem is that in most of these hot communities, the selling price often
ends up being much higher than the asking price, plus houses do not stay on the
market for very long at all. So, buying
low is normally out of the question.
Just try finding a bargain foreclosure or HUD homes for sale in
California, it's a little like trying to find gold in the old days. In these hot communities, the real money is
made by buying and holding for a number of years allowing for the yearly
increases and returns on additions and upgrades. Money can be made for sure, but with a
uncertain future. It is really best to have a payment program set in stone –
always use a fixed term and rate mortgage. You can still sell in five years or
less, make money, and have the added comfort of a fixed payment.
Have an opinion or a question you would like me to answer, then write me!
http://www.CarlHampton.com