50 Year Loan

The reasoning behind a 50 year loan is a simple piece of mathematics which means that buyers can increase the size of the house they can afford in a strongly rising real estate market like California. This means that those with lower incomes relative to house prices can still buy into the market, begin to earn some equity and take part in the Great American Dream of owning their own home.

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The math behind such a 50 year loan is this. Each monthly payment made on a mortgage pays that month’s interest and it also pays off a small part of the principal amount of the loan. That is, the actual amount that was borrowed in the first place. The interest amount will be different under a number of different assumptions (fixed or adjustable rate and so on) and the principal payment will vary according to the length of the loan. If you have a 30 year loan then you will be making 360 monthly payments. If you have a 50 year loan then you will make 600.

Obviously, if you are making more payments then each single payment to pay off that principal will be smaller. Of course there are more interest payments as well, which increases the total amount paid over all of the years, but a 50 year loan can help people who would never be able to buy a house any other way, by reducing the cost to them of each and every monthly payment. This increase in affordability can be a great help in strong real estate markets like the California housing market.

You should, however, understand that over a term of 50 years you’ll pay an awful lot of money. Take a look at this example:

Amount borrowed: $200,000

Interest rate: 5%

Total Due over 50 Years: $544,941

Clearly, even at this low interest rate a 50 year loan makes no financial sense. Your monthly repayment would be $908.29. If you borrowed the same amount over 30 years (with the same interest rate) your repayments would be just $165 extra, and you would save a grand total of $158,433 over the life of the loan. My advice? Go for the 30 years.