Wednesday, February 22, 2006

Don't worry about the 50 year mortgage...it isn't going to save things


I have received several e-mails from readers that are feeling like this thing is never going to end because there is talk of a 50 year mortgage coming out. My thought is not to worry. It will only delay the inevitable slightly, if at all. Here is an article about the possibility of a 50 year mortgage.

Let's look at a few choice comments from the article:

The longer-term mortgages would lower monthly payments. No, really?!?!?

"To the extent more consumers have more products available, it will be a help for affordability," said Douglas Duncan, chief economist at the Mortgage Bankers Association.

And you all though I was kidding when I have told you that all 'most' borrowers care about is "LOWEST PAYMENT". Instant gratification rules in America. Why worry about tomorrow when you can have something today...at a 'low' payment. Just stretch the payment out long enough, and everything can be 'affordable'. At what point do we quit looking for ways to artificially inflate the 'price' of assets?!?!?

Keith Gumbinger of HSH Associates, which tracks the mortgage industry, believes lenders will likely generate some borrower interest with the 40-year loans.

Where has Keith been lately? Most of the subprime lenders are pushing the 40yr loan. There are several lenders that have a 40-year option-ARM already. From what I have seen, brokers want lowest payment possible, and naturally, this is the 40-year mortgage term. Finding a 40-year loan is about as hard as finding porn on Google.

I don't know what percentage of loans will be 40 year loans, but I can tell you that the 2/38 and 3/37 are quite the popular subprime loans now. The payment is about the same as the interest only payment, and the rate 'add on' is usually less for the 40 year loan than for interest only. I'm not in capital markets, but I can only attribute this change to the performance of the loans in the secondary market. If the investors want a higher return for interest only (I/O), then look for the lenders to push the 40 year. The lenders will 'sell' whatever they can make the most money on.

Lets get back on track here. Lets see how much of a difference a 50 year mortgage makes over the 30 and 40 year mortgages. I have done a similar post before where I even looked at 100 year mortgages...but since many of you seem to be into animal cruelty, I will continue to beat this dead horse ;) ....just please don't tell PETA!

Let's look at some NUMBERS and do some MATH. I know, I know...doing math, thinking, and using logic really sucks! ...but hey, somebody has to do it. It can either be me, or one of the great "Appleton-economists" of the California Association of Realtors....you choose.

$400,000 loan at 6% 30yr fix = $2398.20 . . . . .total pmt = $863,352
$400,000 loan at 6% 40yr fix = $2200.85 . . . . .total pmt = $1,056,408
$400,000 loan at 6% 50yr fix = $2105.62 . . . . .total pmt = $1,263,372
$400,000 loan at 6% 100yr fix = $2005.04 . . . . .total pmt = $2,406,048

$400,000 loan at 7% 30yr fix = $2661.21 . . . . .total pmt = $958,035
$400,000 loan at 7% 40yr fix = $2485.72 . . . . .total pmt = $1,193,145
$400,000 loan at 7% 50yr fix = $2406.75 . . . . .total pmt = $1,444,052
$400,000 loan at 7% 100yr fix = $2335.50 . . . . .total pmt = $2,802,600

At 6%, the 30 year mortgage payment is $292.58 more than the 50 year mortgage payment. That is 13.9% higher. In the long run it costs $400,020 or 46% more to do the 50 year mortgage than the 30 year mortgage. It is interesting to note, that at the 7% interest rate, the difference between the 30 and 50 year payments is only 10.6%. So as rates rise, the benefit of the 50 year mortgage appears to decrease. You can also see that there is very little difference between the 40 year mortgage and the 50 year mortgage payment. The $80-$95 bucks a month saved isn't going to help people that much financially. It will only stretch the amount of property you can buy over the 40 year mortgage by about 3-4%. That is not going to send the market 'off to the races again'. People are speculating on real estate for 20-30% returns, not 3-4% appreciation (not inflation adjusted...but we can save those arguments for another day). Heck, I'm getting over 4.3% in my PayPal account!!

Let's say you can afford the $2398.20 payment for the 30yr fixed, but you decide you want to 'buy' more home. For the same payment on a 50 year mortgage, you could buy a $455,600 home. How much more home can you really get for 55k?!?!? Is it worth an extra $400,000 in excess payments to have an extra 55k of home today? Heck, if you are buying from a builder, I don't think you have ANYTHING to worry about. You haven't seen that much slashing since Friday the 13th. I leave it up to you to decide. I'm not here to tell you what to do, just to try and give you some info so that you can make an informed decision.

Don't forget, that at this time, they have not applied interest only to the 40 year mortgage. There are several 40 year option-ARMs out there, but there are extra fees charged, or adds to the rate. I'm looking forward to a stated income, no doc, 1000 year, option ARM, with no pre-pay penalty, and taxes rolled into the loan....there is a sweet house on the coast I have my eye on, and I think I can work the payments if the loan term is long enough... (Yes, I'm joking...just like this site)

I was going to leave things simple by using the same rate for all mortgage lengths as it 'errs' on the side of showing the 'benefit' of the longer term mortgages, but after reading some of the comments, I feel that I should make another comparison. When you go for the longer term mortgages, there is an 'add' to the rate. This add fluctuates between companies, and with monthly specials (usually .10 to .40 bps) but a .25 add to the rate is relatively common, so I will use that. This extra .25 would be added to the 40 year term. I assume an even larger add would be made to go to a 50 year term (.35-.45 maybe??...I don't know). So to 'err' on the low side, I will show a .10 and .25 add for the 40 year mortgage, and a .25 and .35 add for the 50 year mortgage. Now let's have a look at the savings when these rate 'adds' are included:

$400,000 loan at 6.00% 30yr fix = $2398.20 . . . . .total pmt = $863,352
$400,000 loan at 6.10% 40yr fix = $2228.80 . . . . .total pmt = $1,069,825
$400,000 loan at 6.25% 40yr fix = $2270.95 . . . . .total pmt = $1,090,060
$400,000 loan at 6.25% 50yr fix = $2179.89 . . . . .total pmt = $1,307,934
$400,000 loan at 6.35% 50yr fix = $2209.80 . . . . .total pmt = $1,325,880

Now if you look at things, the 'more realistic' .25 add for the 40 year mortgage only saves you about $128 a month on payment, but costs an extra $226,000 over the life of the loan. Basically, the rate adds chip away at the benefit of the longer term mortgages, and makes them more expensive in the long run.

Here is what many brokers will tell you. "I have a loan where the payment is about $300 bucks a month less, do you want that loan?". Uh, what do you think 'most' people will say? Do you think they will do the long term math? ...or heck, ANY math for that matter?!?!?

One of the things that really cracks me up, is when I'm in an office and one of the loan officers slams the phone down and says "@#$%&!!!! the mother$#@&* wants to run it by his financial planner before we move forward!!!" This is usually followed by the lead being balled up and tossed into the trash can. I smile on the inside knowing that at least the borrower is smart enough to run major financial decisions through some sort of an 'expert'. It is even funnier to hear the brokers try and talk the borrowers into doing something their financial planner or accountant told them not to do. Total comedy!

That said, if the only way you can afford a home is with a 50 year mortgage, I would suggest you wait a little bit. There is more to life, than making a mortgage payment for 50 years of one. With the average life expectancy in the high 70's, you had better start making mortgage payments when you turn 18 so that you can have your house paid off before you kick the bucket. Yeah, I know...people move every 3-5 years now, so who cares about paying off your mortgage....real estate only goes up! YAWN....fundamentals are soooo old fashioned.


On a side note, San Diego inventory is at 17,058 today...another 30 properties added in 1 day. We are closing in on 1000 posts in the forums! I think that is great considering they have only been up, along with this new site, for about 3 weeks.

I look forward to the comments and feedback!
---
I am going to keep making my posts over here, but most of the comments are happening at the new site. Go to...
www.housingbubblecasualty.com
or
www.anotherf@ckedborrower.com

...if you would like to see more comments and activity. Don't forgot to check out the activity in the FORUMS!

SoCalMtgGuy

8 Comments:

Anonymous npugypok said...

all valid points. Also the rate for the longer mortgage is likely to be higher then for a shorter one. that should make the difference in monthly payments (3oyr vs 50yr) even smaller.

2/23/2006 6:49 AM  
Anonymous Anonymous said...

Here's an oc realtor who clearly thinks there is no bubble. Maybe your readers can give him some facts.
http://beachcities.blogspot.com/

2/23/2006 9:19 AM  
Anonymous Anonymous said...

I left a post over there...but the guy moderates the comments, so it will probably never show up.

Steve

This is what I posted:


Where is your data that HALF of the homes in Orange County are owned free and clear?

Can you provide links to this data?

Where did you get the data that only 7% of the mortgages in the OC are rate sensitive?

If you read the OC Register, you would know that Orange County is consistently been using ARMs in about 70% of mortgage transactions the past few years.

http://www.ocregister.com/ocregister/money/housing/article_1008873.php

Fact: In January, 72 percent of Orange County's homebuyers chose adjustable-rate loans to finance their deals. That's the lowest use of these loans since May 2004.

Also from the OC Register, 82% of purchase loans in Orange County from Nov 04 to Nov 05 were interest only or option ARM.

http://blogs.ocregister.com/morningeye/archives/2005/12/the_future_and.html#more

I got this info from reading a blog by a guy in Orange County that has a blog called anotherf@ckedborrower.com. He provides links to his data, it would be nice if you would do the same.

Steve...in the OC

2/23/2006 9:55 AM  
Blogger Metroplexual said...

That data can be obtained on the census website. Caveats include; that it is sample based data, and it is 6 years old.

2/23/2006 2:28 PM  
Blogger Londonernow said...

I don't think this is going to make that much of a difference as if you're looking to stretch as much as possible you'd go the interest only route (or better yet the neg am route) which has been around now for a while.

2/24/2006 8:07 AM  
Anonymous Anonymous said...

I check your site daily for new postings...all great!

2/24/2006 9:59 AM  
Blogger Out at the peak said...

LOL, damn those financial planners!! That's the funniest thing I've read in awhile.

2/25/2006 12:22 PM  
Anonymous QUALITY STOCKS UNDER 5 DOLLARS said...

Did I hear 50 year mortgage.

1/27/2013 5:28 PM  

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