SF: The Creative Lending Continues
Though the fixed rate ARMs have proven to pack more of a punch than many of us anticipated, that does not mean that lending will now become strictly conventional. No, in fact now is the time when we might see the 30 year fixed morph into the 40 year fixed, or even the 50.
According to the San Francisco Chronicle,
The 50-year fixed-rate mortgage, which some lenders began offering last year as a way for borrowers to secure lower monthly payments without exposing themselves to the risk of interest rate increases associated with adjustable-rate loans.
However, since the time these loans were thought up, no major lender has stepped forward to offer the loans – “partly because borrowers were not clamoring for them, and partly because investors did not want them. ” In fact, government-sponsored companies like Fannie Mae and Freddie Mac, which buy mortgages from lenders and resell them to investors, will not purchase 50-year loans. “As a result, lenders who issue these mortgages must sell them directly to other investors or hold on to the loans themselves.”
Who then do these mortgages appeal to?
50-year mortgages were meant to appeal to the same crowd as two other, more established, loans. The first is the interest-only loan, in which borrowers pay only the interest for a set period of time – usually 10 years or less – before repaying the principal on an accelerated basis. The second is the 40-year fixed-rate loan, in which monthly payments are lower than for mortgages with shorter terms, simply because they are stretched over a longer period of time.
The problem for homeowners though, since historically most sell their homes within seven years, is that building any significant equity in the house is going to be difficult with a 50 year mortage. Still, monthly payments are lower with a 50-year loan than on a 40-year loan. “For instance, a $350,000 loan at 7 percent for 50 years would cost $2,106 a month, while the 40-year loan would cost $2,175. Still, the interest-only loan would cost only $2,042 a month for the first 10 years, although not a cent of principal would be paid in that time.”
So, if you are in the market, here is yet another slightly scary, certainly creative, way to make your dream of ownership become… reality (?).
