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
"Your"
Money Matters By Carl Hampton
Author of "From
Credit Despair To Credit Millionaire"
