Yesterday, I received an email from a friend who is moving into a new home that he’s financing with a *fifty* year mortgage. He was bragging about how low his payments were *and* he’s putting equity into his house. For regular readers of this site, it shouldn’t be a surprise that I quickly loaded up my spreadsheet of choice and got down to business looking at the numbers. If you’d like to play along at home, here’s my favorite online mortgage calculator.

First of all, **according to this article, fifty year mortgages are typically 5/1 ARMs with a quarter percentage point higher than a 30 year loan.** What does that mean? Over the first five years of the loan, the borrower will pay about 0.25% more than a typical thirty year fixed rate mortgage, but after that, the rate adjusts annually to match the prime lending rate.

Since we have no idea what will happen with interest rates five years down the road, the only way to really evaluate such a loan is over the first five years of the loan. Let’s take a look.

Let’s say that we’re buying a $250,000 home and we have a $50,000 down payment. We can either take a 30 year loan at 6%, or a 50 year loan at 6.25%.

**Monthly payments** With the 30 year mortgage, your monthly payment would be $1,199.10. With the 50 year mortgage, your monthly payment (for the first five years, as mentioned above) would be $1,089.95. The obvious winner here is the longer term mortgage; even with the higher interest rate, it is cheaper per month. But the news gets bad from here on out.

**Equity in house after five years** Let’s say that in five years you’re ready to sell the house and move on. We’ll also assume that your house value went up 10%, so now it’s worth $275,000. For the thirty year mortgage, you still have a balance of $185,840, which means that you now have $89,160 in equity in the house. On the other hand, with the fifty year mortgage, you still have a balance of $196,544, which means you have only $78,456 in equity in the house. With the thirty year mortgage, you have $10,704 more in equity after five years.

Now, the difference in your monthly payments is $109.15, so over sixty months, you’ll pay $6,549 more with the thirty year loan, but you end up with $10,704 more in home equity. That’s a 63% return over five years, or about 11% a year. I don’t know about you, but if I can afford an investment that returns a guaranteed 11% a year, I’m quite willing to dump $110 a month into that investment.

In short, **a fifty year mortgage simply isn’t worth it.** A thirty year mortgage is actually an extremely good investment versus a fifty year, and *we’re not even considering the bad things that can happen when your rate adjusts with the fifty year.* There’s pretty much no reason to ever consider getting a fifty year mortgage unless you enjoy handing a lot of money to your mortgage company with nothing in return.

Not only that, who wants to be paying a mortgage into your 70’s and 80’s?? Doesn’t make sense.

FT

Since you’re only looking at it from an investment perspective, you need to calculate a return on the differential between the two payments.

You’d also need to take into account the tax implications. The 50 year will also result in more interest paid out in the first years. This results in a greater tax break, so the effective interest rate is not quite 6.25%, just as the 30-year isn’t quite 6%.

Further, depending on your tolerance for risk, your home might be the last place you want your wealth. Greater home equity is not always a good financial move.

I’m not suggesting one is better than the other because it depends on your individual situation, but I don’t think you can make a blanket statement that one is always better than the other.

In order for the investment return on the difference between payments to make up the difference in equity value in the two situations, you have to be dumping that money into something that earns 18% per year every year for the five years we’re looking at here. That’s a percentage that isn’t realistic for almost any individual investor or else we’d all be crazily rich.

Even if you include the tax benefit differential, if you’re in the 28% bracket, you’re netting about $200 more per year. Even if you add that into the equation, you need to be returning about 14% annually.

If you can find an investment that can safely beat those returns, then by all means go for a 50 year mortgage.

Trent,

My point is that your analysis is far to simple to arrive at the conclusion that the 30-year is always better than the 50-year. A better answer is: It depends.

Over a longer period, the payment differential can compound into greater returns. You’re looking at two potential investments: one 30 years and one 50 years. And you’re concluding that one is better based on an analysis of the first 5 years. To only look at the first five years is basically “cooking the books” in favor of the 30-year.

You really do not have to explain a 50 year mortgage

The title along should make anyone scream. Who in they right mind would want a 50yr debt?

The problem with anything beyond a five year analysis is that you don’t know what the interest rates are going to do. 50 year mortgages right now are almost exclusively sold in a 5/1 ARM form, so you can’t make any calculations beyond the first five years. After that, it’s complete guesswork. I can speculate that, based on historic interest rates, that your interest rate will go up on the 50 year after the first five years, making it even worse than it already is, but no one can say for certain where interest rates will be in five years.

Given what we can actually look at, it’s pretty clear that the 50 year is a worse deal than the 30 year.

Okay, I’m going to do a write up about this and go into more detail. :)

But here’s another scenario to consider. In your example, you assumed identical down payments, but perhaps a better way to look at it is to assume identical monthly payments.

If you want the 50-year to have an monthly payment of $1,199.10, you would simply put down only $29,970. If you were to invest the down payment from day 1, you would only have to earn a 9% return to come out ahead and that’s even before considering the tax implications. (In this case the tax break will only be marginally better since the interest payments in the first 5 years of both mortgages are going to be pretty close, but it still counts.)

More importantly, the money that did not go into a down payment has now grown to over $30,000 and can continue to earn a return. If it was trapped in the home equity, the return is 0%.

Steve: what about the PMI for having made less than a 20% down payment? In other words, you can keep setting up straw men and smacking them into each other over and over again. That’s why I tried to simplify it a bit in the post and look at it strictly as an investment.

Absolutely, what about PMI? Or what about instead of PMI you get a 80/20 mortgage? All these need to be considered. And I’m not sure what you mean about straw men. The scenarios I’m suggesting for analysis are just as plausible than the one you present.

Again, my point is that your assumptions negate the benefits of a longer term mortgage. Of course your scenario came out for the 30-year, the assumptions favored it.

This is a very complex analysis and you’ve taken one scenario and concluded that “There’s pretty much no reason to ever consider getting a fifty year mortgage…”

I’m not disagreeing with your numbers, only that you can draw such a conclusion from them.

I wrote an article about 30 year mortgages you might find interesing here:

http://www.rattz.com/publicportal/Miscellaneous/WiseHomePurchasingDecisions/tabid/278/Default.aspx

If Steve doesn’t like your 50 year versus 30 year analysis, he will really dislike my article! ;-)

Annual payment on $200K 50 year 6.25% mortgage: $13133.60

Annual payment on $200K 30-year 6.00% mortgage: $14529.78

Annual payment difference = $1396.18

Balance due on the 50 year mortgage after 30 years = $147,648

Balance due on 30 year mortgage after 30 years = $0

Amount you will have if you invest $1396.18 annually for 30 years at 7.62% = $147.648 This is just enough to pay off the balance on your 30-year mortgage. If you get more than 7.62% then you will have money left over when you pay off the mortgage.

Thus assuming fees for the 30 and 50-year mortgages are the same, if you think you can get more than 7.62% on your investments then you are better off with the 50 year mortgage, provided you disciplined enough to invest the payment difference and don’t blow it on your girl friend.

The above analysis did not take taxes into account. If your investment returns are taxed at your ordinary tax rate, then the break even rate of return on investments would be the same.

If your investment income is tax free (as in a ROTH IRA), is tax deferred or is taxed at capital gains rate that is lower than your regular tax rate (as when you sell a long-held stock), then you can break even taking the 50-year loan if your investment pays somewhat less than 7.62%. with the actual break even point depending on tax rates.

The biggest problem with today’s consumer market is the down payment. Most first time home buyers are not going to put 20% down on a new home purchase. They will put 10% (because they cannot save enough) and then take the 50yr 5/1 term putting little money down looking for the short term “easy” way out with a hope of a higher wages in five years.

” I don’t know about you, but if I can afford an investment that returns a guaranteed 11% a year”

It’s not guaranteed. Some homes have devalued 20% over the last year and a half. I agree the 5/1 Arm is insane. Stay away from sub prime adjustable rate lending. Too many people are loosing their homes to this and the market situation.

Any 50 year fixed mortgages out there?