Saturday, February 18, 2006

Plan On Dying in your House?

Are 100 year loans far off? In the latest attempt to draw every last ounce of air from the bubble, lenders are giddy about the possibility to offer..... 50 year mortgages. link This is done in an efort to " help some consumers qualify for loans."

We can attribute this insanity to the reintroduction of the 30 Treasury bond. Now lenders no longer will have to price paper off of the 10 year issue, they will be able to use the 30 year. Apparantley, 40 years is not long enough to pay back a loan.

"The reintroduction of the 30-year bond means lenders — who had relied on the government's 10-year note for mortgage rate guidance — have a better idea of what to charge homebuyers for a 40-year mortgage. There is also some talk among lenders, who are always looking for new mortgage products, about creating a 50-year home loan. The longer-term mortgages would lower monthly payments."

Steve LaDue, president of Affiliated Mortgage in Wauwatosa, Wis., said, "bankers could also create a 50-year mortgage because of the Treasury's 30-year bond sale. This would be a product lenders could sell to first-time home buyers, or what LaDue calls "a gateway product."

Well, how much in savings will this mean to a homebuyer for extending out a loan to 50 years? A whopping $22 per $100,000 vs. the already ludicrous 40 year loan. Notice it doesn't say how much more in total amount financed the loan will be, having an extra ten years' interest tacked on. Here is a simple calculator that reveals that small detail calculator .. On a 50 year loan, the monthly payment for this loan would be $563.72. The total principal plus interest on this loan would be $338,232.00, of which $238232.00 would be interest. On the 40 year loan the monthly payment for this loan would be $585.46, the total principal plus interest on the 40 year loan would be $281020.80, of which $181020.80 would be interest. Over $50,000 more interest for $22 less a month in payment. And borrowers that only went 30 years? The monthly payment for this 30 year loan would be $632.07. The total principal plus interest on this loan would be $227545.20, of which $127545.20 would be interest. To put things in perspective, you are trading off paying about $60 less a month to be saddled with about double the amount in total interest amount in dollars. Such a deal!!!

"Last week, home buyers could get a 40-year $100,000 mortgage at a rate of 6.50 percent which meant their monthly loan payments were $585.00, according to HSH's Gumbinger.
A 30-year loan, meanwhile, had a 6.25 percent rate and a home buyer with a $100,000 loan had a monthly loan payment of $616
. "

"The new loan products, though, could be of help for a housing market if they improve affordability at time when sales have slowed and inventories have ballooned. Chris Low, chief economist at FTN Financial, a financial services firm, said longer-dated home loans could prevent a dramatic drop in the housing market because their lengthy payback periods would lower monthly payments at a time when interest rates for other mortgages have risen from historic lows. It is a kind of a way to play games with monthly payments," said Dick Bove, banking analyst at Punk Ziegel. "Stretching out the mortgage maturity is simply a way to lower month payments and stimulate sales."

I could not agree more with Mr. Bove. It is merely playing games to stimulate sales, and it will be targeted at first-time buyers and others that otherwise could not afford to purchase.


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