Housing Trends: The Fifty Year Loan

In the face of ever-spiraling housing costs, some banks in the UK now offer mortgage loans up to fifty-two years. Even the federal Fannie Mae foundation in the US permits housing loans up to forty years, and California recently begun selling fifty year mortgages.

There are times when a protracted mortgage may be appropriate. Extending housing loans another ten years does reduce the amount of monthly payments, albeit only marginally. The payment (principle and interest only) drops by approximately seven percent per month, based on a loan of $200,000 at seven percent interest. If a buyer won't be holding onto the property for very long, and can sell at a good profit, it's a worthwhile deal. A buyer can afford more house for the money than they could otherwise purchase.

As a buyer's credit score declines and the housing interest rate rises, however, the margin of savings narrows. It takes a thirty-percent interest rate before a forty-year mortgage payment actually exceeds a thirty-year monthly installment.

When it comes down to it, though, the per-payment level is only the tip of the iceberg, regardless of credit score.

The Big Picture Packs a Wallop

Taking that same seven percent loan rate and a $200,000 loan, the thirty-year monthly payment is $1330.60 per month (principle and interest only.) The forty-year installment is $1242.86.

At thirty years, you're paying a total of three hundred sixty payments. Forty years bumps that up to four hundred eighty. The math from there is simple - and enough to make the average worker choke.

360 x $1330.60 = $479,016.00
480 x $1242.86 = $596,572.80

That's a difference of $117,556.80, and an extra decade of mortgage.

The Forever Payment

Following the lead of the United Kingdom, California has debuted a fifty-year housing loan here in the US. Taking that same $200,000 mortgage at seven percent interest and extending the loan to fifty years brings the monthly costs to $1203.38. Over the course of the loan, the cumulative payments add up to a whopping $722,028.00.

That's assuming a buyer lives long enough to pay off the loan in full. A fifty-year mortgage, issued to a twenty-five-year-old, won't be paid off until after the buyer's seventy-fifth birthday. If it's a person in their thirties at purchase, their payoff won't happen until they're in their eighties. It's doubtful a forty year old will live to see his mortgage retired.

Out of Sync

It's no secret that housing costs in the US have spiraled out of control for years now. Predictions that the housing bubble will burst still doesn't change the fact that for most people, the American Dream of owning a home isn't ever going to be possible. Finding decent, affordable rental housing is a real challenge for a single wage earner in an entry-level position, and can be tough for middle class two-income families.

As of mid 2006, the median cost of a new home was $235,300; the median income per family in 2005 was $46,326. (Income figures for 2006 were not yet available from the US Census Bureau as of this writing.) Depending on the amount of down payment, a buyer may qualify for a house payment of as much as forty percent of their income. For that median wage of $46,326 per year, that means a maximum monthly payment of $1522.20 per month. At seven percent interest, the monthly principle and interest payment on a thirty-year $235,300 housing loan would be $1565.46. Extending the loan to forty years drops the payment to $1462.23; and to fifty years, $1415.77. Of course the long-term implications are staggering, but what's the alternative?

Pop Goes The Weasel

The predicted burst of that housing bubble has already begun. Empty properties are proliferating and housing prices are flat or falling.

When a house goes up for sale, a three percent commission comes right off the top. If there's no equity in the home, the buyer can come out with nothing, or even owing money after the sale. That carries staggering implications, particularly when you factor in how many baby boomers are counting on the sale of their home to fund their retirement.

In a worst-case scenario, some homeowners may elect (or be forced) to walk away, defaulting on their housing loans.

Foreclosure brings its own set of complications. IRS rules say if a bank forecloses on the home because the owner can't pay, and the bank sells it below the original value of the loan, the defaulting homeowner is liable for the difference. That margin, interpreted as forgiveness of debt under the law, is considered taxable income to the defaulting homeowner.

Wage Base No Help

Low jobless figures are a deceptive way to look at US financial health. Wages have remained more or less flat for several years, while housing prices continued to spiral during the same period. For that matter, the federally-reported unemployment rate is itself misleading, as it is based solely on new filings for unemployment benefits. Comparatively speaking, only a small portion of the unemployed apply for benefits. It says nothing about those who quit, were fired or are otherwise unable to receive unemployment compensation, including the chronically jobless.

The reported unemployment numbers also fail to reflect how many of those workers go on to underemployment, taking lower paying jobs just to survive. With housing prices so elevated that there's virtually no margin for savings, a higher-than-ever proportion of homeowners are just a couple of paychecks away from financial disaster.

Empty Boxes

The housing industry is already feeling the pinch. According to a MarketWatch.com report dated January 27, 2007, the number of vacant housing jumped a staggering 34 percent from a year prior. It's the biggest such increase ever recorded. While the glut of housing means some owners will necessarily offer units for rent, what happens when nobody can afford to rent, either?

One analyst predicted that the abundance of vacant housing will automatically translate into overall lower rental costs. That still doesn't explain how homeowner ABC will be able to pay his mortgage of $2000 a month if he rents for $1500 a month.