Long term mortgages were all but non-existent until several years ago, and they are becoming increasingly popular among young and low-income families. A normal mortgage loan spans between 15 and 30 years, while a long-term mortgage loan can be spread over 40 or 50 years, which is a significant period of time. Although spreading payments over 40 years might be attractive at first, some people fail to read the fine print.
Investments
Some people use long term mortgage loans for investments because they have no intention of ever keeping the loan for forty or fifty years. While they pay off the loan in small monthly increments, they renovate or repair the property and then sell it for profit. At that time, they are able to pay off the entire loan while still pocketing the money that comes from the risen value of the property.
In this instance, a long term mortgage is advantageous to the investor because he or she doesn’t suffer from high interest payments or depreciation of property value.
Young Families
Purchasing a first home is a daunting experience, and it can be tempting to take out a long term mortgage as a precautionary measure. Perhaps the owner(s) feel no job security, or they are worried about the added expenses of starting a family.
This can be both good and bad for young individuals. They will experience lower monthly payments, but they will have committed to a long-term loan. Real estate is becoming increasingly difficult to predict, and it is nearly impossible to estimate what a home will be worth in even twenty years – much less fifty.
High Cost Housing
Residents of the west coast and the northeast are experiencing rising housing costs, and may turn to a long term mortgage to battle against the high price of their new home. This may lower the payments, but it can be harmful when it comes to building equity. Homeowners with long term mortgages take much longer to build equity, and therefore have little asset when it comes to their home.
Small Down Payment
Families who are buying their first home or who are moving up in the housing market might consider a long term mortgage payment to offset their low down payment. This, as with the high cost housing reason, will delay the amount of time that passes before you are able to build substantial equity in your home.
When you are considering your mortgage loan options, carefully read as much literature as possible so that you’re educated about the consequences and benefits of long term loans. These are some of the factors that should be taken into consideration:
Interest Rates
While you will be saving money on the monthly principle payments, you might find that those savings are offset by high interest rates. Mortgage loans spanning more than thirty years will usually have substantially higher interest rates, which can be a devastating blow to a homeowner who didn’t do his or her research.
In addition to paying more for your home in interest, you will also be offsetting the equity you build in the property. While your monthly payments will be higher due to interest, equity is only achieved through payment on the principle.
Future Plans
Do you hope to stay in this house for the entire duration of the loan, or will you move before the entire loan has been paid?
As I stated before, the real estate market is finicky and unpredictable, and long term mortgage holders are at a greater risk of suffering debt. The longer you live in a house, the further it can depreciate. If your house’s value decreases too much over the next several years, the amount of equity and the sale price of your home may not be enough to cover the repayment when you sell.
Your Motivation
Is there a significant reason why you need to purchase a house now? Are you considering a long term mortgage because you don’t think you will be able to make the payments on a shorter loan? Agreeing to a long term loan because you are desperate to purchase a house is not a good reason, and may result in consequences later. Consider the possibility that this is not the time, and that you should wait until your income is more stable before making such a large financial decision.