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| First it was 30. Then it was 40. Now, a California lender is offering 50-year mortgage loans. But just how big is the benefit of going it two decades longer than the typical residential loan?
In an environment in which home prices are increasing and affordability “has become a real concern,” the 50-year loan program allows for homebuyers or homeowners to qualify for more home and keep payments more manageable, Statewide Bancorp Inc. recently announced. While pay-option and interest-only adjustable-rate mortgages have become popular over the last few years, there is no principle reduction and there is possible negative amortization. The new longer-term loan provides “an alternative to these loans that also maintains low payments but are fully amortized over 50 years,” the Rancho Cucamonga-based company noted. Common uses of the 50-year loan, which even borrowers with credit problems may qualify for, include purchasing a new house, consolidating debt, funding education, and making home improvements, all at a lower interest rate than is available with credit cards or other unsecured debt, Statewide said. The 50-year loan is initially fixed for five years and thereafter adjusts to the 6-month London Interbank Offered Rate plus a 2.75% margin, company Vice President JR Diaz told MortgageDaily.com. Freddie Mac reports the average 15-year fixed rate is currently at 6.25%. On a $500,000 loan, the principal and interest payment at those terms would be near $4,300. But if the amortization is expanded to 30 years on a fixed rate loan, which reportedly averages 6.50% currently, the payment drops to $3,160 — a savings of over a thousand dollars compared to the 15-year. Statewide says its initial fixed-rate is 5.75% — leaving the borrower with a monthly payment of $2,540 for the first five years. Basically, the borrower would pay an additional 20 years (compared with a 30-year mortgage) and save about $600 a month for the initial term. After five years, the rate would jump to 7.74% based on the current 4.99% 6-month LIBOR rate reported by Fannie Mae. The payment would increase to around $3,300 based on the new rate — higher than the 30-year payment. Statewide does not offer the program to brokers or correspondents, Diaz said. |
Coco Salazar is an assistant editor and staff writer for MortgageDaily.com. e-mail: [email protected]
